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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended July 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from __________ to __________
Commission File No. 0-23242
WEBCO INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
Oklahoma 73-1097133
(State or other jurisdiction (I.R.S. Employer Identification Number)
of incorporation or organization)
9101 West 21st Street, Sand Springs, Oklahoma 74063
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code - (918) 241-1000
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Name of Each Exchange
Title of Each Class on Which Registered
Common Stock, par value $.01 AMEX
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes [ X ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (229.405 of this chapter) is not contained herein, and will
not be contained, to the best of registrant's knowledge, in definitive proxy
or information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. [ X ]
As of September 30, 2000, the aggregate market value of the voting stock held
by nonaffiliates of the registrant was $7,639,000.
On September 30, 2000, the number of shares outstanding of the registrant's
common stock, $.01 par value, was 7,073,723 shares.
DOCUMENTS INCORPORATED BY REFERENCE: None.
WEBCO INDUSTRIES, INC. AND SUBSIDIARY
TABLE OF CONTENTS
Page
PART I
Item 1. Business 3
Item 2. Properties 14
Item 3. Legal Proceedings 15
Item 4. Submission of Matters to a Vote of Security
Holders 15
PART II
Item 5. Market for Registrant's Common Stock and Related
Stockholder Matters 16
Item 6. Selected Financial Data 17
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 18
Item 8. Financial Statements and Supplementary Data 23
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 42
PART III
Item 10. Directors and Executive Officers of the Registrant 42
Item 11. Executive Compensation 46
Item 12. Security Ownership of Certain Beneficial Owners
and Management 50
Item 13. Certain Relationships and Related Transactions 52
PART IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K 54
WEBCO INDUSTRIES, INC. AND SUBSIDIARY
FORM 10-K
PART I
ITEM 1. BUSINESS
General
Webco Industries, Inc., an Oklahoma corporation, was founded in 1969 by F.
William Weber, Chairman of the Board and Chief Executive Officer. Webco is a
specialty manufacturer of high-quality carbon and stainless steel tubing
products designed to industry and customer specifications. Webco's tubing
products consist primarily of: heat exchanger tubing, carbon steel boiler
tubing, stainless steel tube and pipe, and specialty carbon steel mechanical
tubing for use in consumer durable and capital goods. Management believes that
Webco is a domestic market leader in the manufacture of welded carbon steel
heat exchanger and boiler tubing, and the leading supplier of stainless steel
tubing for certain niche applications. The Company's wholly-owned subsidiary,
Phillips & Johnston, Inc. ("P&J"), represents several manufacturers who produce
various non-competing mechanical and specialty tubular products made from
copper, brass, aluminum, stainless and carbon steel, among others. This access
to other tubing products allows the Company to better serve its customers by
offering a full range of tubing products. Through its QuikWater division, the
Company markets a patented direct contact water heater for commercial and
industrial applications. The Company has three production facilities in
Oklahoma and Pennsylvania and five distribution facilities in Oklahoma, Texas,
Illinois and Michigan, serving more than 1,300 customers throughout North
America.
In June 1998, Webco merged with P&J, in a transaction accounted for using
the pooling of interests method of accounting. Accordingly, all historical
financial information is presented as if the two entities have always been
combined.
Unless the context otherwise requires, the information contained in this
report, and the terms "Webco" and the "Company" when used in this report,
include Webco Industries, Inc. and its subsidiary, P&J, on a consolidated
basis.
Industry Overview
Specialty tubing producers occupy a niche between the primary steel
producers and customers who utilize precision tubing in the manufacture of
products primarily for the capital goods and consumer durables industries. As
contrasted with commodity pipe producers, specialty tube mills manufacture
products which are engineered and tailored for more specialized and critical
end-use applications.
The specialty tubing industry was once dominated by the major integrated
steel producers. Over time, these integrated producers lost their competitive
advantage and have largely withdrawn from this segment. In addition, the
industry continues to undergo consolidation, as well as rationalization of less
efficient producers. Despite the consolidation over the past several years,
the industry continues to be highly fragmented and is currently comprised of
independent producers that occupy relatively focused market niches.
The specialty tubing industry has been affected by several trends that are
expected to continue over the next several years. First, customers' increasing
emphasis on just-in-time inventory methods has required tube producers to
increase operating efficiencies to accommodate more frequent, but smaller sized
orders, and has caused tube producers to place greater emphasis on inventory
management and cost control. Second, customers' desires to cut operating costs
through the outsourcing of specific processing functions, such as specialty
tube manufacturing, have created the opportunity for third-party tube producers
to replace production from captive mills. Finally, the impacts of foreign
steel producers on the U.S. markets have caused volatility in the price of
finished goods and the cost of steel sheet coil, the principal raw material
used in the manufacture of tubing products.
MANUFACTURING TUBING PROCESSES
Manufactured Products
Electric Resistance Carbon Steel Weld Process: The Company maintains
inventories of steel sheet coils from which it manufactures tubing using
electric resistance welding. This steel is in the form of a continuous sheet,
typically 48 to 60 inches wide, between .049 and .500 inches thick, and rolled
into 15 to 20 ton coils.
All customer orders for manufactured products are entered into a
computerized order entry system, and the appropriate steel coil inventory is
then selected and scheduled for processing in accordance with the customer's
delivery date and product specifications. The Company attempts to maximize
efficiency by combining orders to optimize size rollings.
The manufacturing cycle begins with the slitting of wide coils into narrow
bands. The outside diameter of the tube to be produced determines the width of
the slit band. Steel coils over .180 inches thick used at the Sand Springs
facility are slit to pre-designated widths by outside vendors. Steel coils
less than .180 inches thick in Sand Springs and substantially all coils in Oil
City are slit in each facility using Company equipment.
Conversion from slit band to carbon and alloy tubes is accomplished by (i)
continuously roll forming into the desired tubular diameter; (ii) continuously
welding the edges; and (iii) cutting to approximate finished length or
multiples thereof. After the tube has been welded and depending upon product
specifications, it may be moved to three further processing stations for
annealing (heat treatment through an atmospherically controlled roller hearth
furnace), straightening through rotary straighteners, and finishing (i.e.,
cut-to-length, non-destructive test, stencil, oil coat and package). The
Company has stringent quality control standards in place at each stage of the
manufacturing process.
This process produces welded heat exchanger tubing, boiler tubing,
mechanical tubing and hollows (the raw material for the cold drawing process,
which does not go through the finishing process). Hollows are primarily for
specific cold draw orders, however, smaller amounts are produced for inventory.
In fiscal 1995 the Company placed into service a high frequency welded
carbon tube mill ("Mill 3") at the Sand Springs, Oklahoma facility. In North
America, the Company is aware of only one similar mill operating in the United
States and one duplicate installed in Toronto, Canada. Prior to the third
quarter of fiscal 1997, the Company was not able to fully utilize the
manufacturing capabilities of Mill 3 because certain cut-off equipment would
not perform to vendor specifications. A new cut-off machine was installed on
Mill 3 during the third quarter of fiscal 1997 to replace the original cut-off
equipment. The correction of this cut-off problem provides the Company the
ability to manufacture tubes with diameters and wall thickness more consistent
with original expectations, thereby creating the opportunity for the Company to
further penetrate the mechanical tube markets, as discussed below.
Carbon Steel Cold Drawing Process: The Company maintains inventories of
tubing hollows, which is raw material for the cold drawing process. Most of
this tubing is manufactured by the Company's own weld tube mills. The Company
currently offers precision, made-to-order cold drawn products from .250 inch
to .375 inch in wall thickness for mechanical tubing and a limited amount of
heat exchanger and boiler tubing. Cold drawing permits greater flexibility and
precision (as compared to the weld process) in meeting customer specifications
of tube diameters, wall thickness and other characteristics.
Cold drawing orders are entered into a computerized order entry system.
Raw materials are selected to optimize yields and efficiency and meet the
customer's specifications and required delivery schedule. After the proper
material has been selected for each specific order, it is cut to the desired
length. The tube is then (i) pickled and lubricated through a series of tanks,
(ii) pointed to taper the tube end, and (iii) cold drawn (cold reduction of
outside diameter and inside diameter and elongation of tube). After the cold
drawn tube has been manufactured to finished size, it is moved to three further
processing stations for annealing, straightening and finishing.
Welded Stainless Tube Processing: The manufacturing cycle for the
stainless steel weld mill operations begins with the receipt by the Company of
stainless steel coils slit to a pre-designated width by the vendor.
Customer orders are entered into the computerized order entry system.
Slit coils are selected and fed into the stainless weld mills to be formed into
a tubular shape and welded by an automated gas or laser welding process. After
welding, the tube is annealed, cooled, straightened, stenciled,
non-destructively tested, cut to length and packaged for shipment. For some
special customer requirements, the tubing is coiled to lengths up to 20,000
feet. Most of the processing is performed in a continuous operation.
Stainless processing provides air-cooled heat exchanger tubing,
instrumentation tubing and small diameter stainless pipe. The majority of
stainless products are also made-to-order.
Other Tubing Products
The Company either outsources the fabrication of its Other Tubing Products
or performs value added processing, such as cutting to length and end finishing
the product, using owned equipment. Highly specialized and technical
applications are generally outsourced. Other Tubing Products consist of
tubular goods made of stainless steel, carbon steel, copper, brass, aluminum,
and surgical steel purchased from other manufacturers.
QuikWater
At the QuikWater facility in Sand Springs, Oklahoma, the Company began
outsourcing the fabrication of the units to an outside vendor in late fiscal
year 2000. All units are built to the Company's and its customer's
specifications. The Company supplies all of the required components based upon
the specific size and model of the unit. Once completed, the unit is fully
tested and then shipped to the customer's site where it is installed by the
customer or a Company representative.
Tubing Facilities
The Company has three manufacturing facilities for producing carbon or
stainless steel tubing products. The largest facility is located in Sand
Springs, Oklahoma, which produces a wide range of carbon steel tubing products.
This facility has been in operation since the Company began in 1969. The
Company also has a facility in Oil City, Pennsylvania, which produces primarily
boiler and as-welded mechanical carbon steel tubing products. The third
facility in Mannford, Oklahoma, produces stainless steel tubing products. The
Company expects that its expansion in Oil City will be complete and commence
production in January 2001. The additional 36,000 tons of welded capacity will
create company-wide additional capacity for its welded carbon steel heat
exchanger and boiler tubing and welded and cold drawn mechanical OEM tubing
markets.
The following table sets forth the processing and other techniques
performed at Webco's facilities:
Manufacturing Distribution
------------------------ --------------------------------------------
Sand Oil Sand Grand Glen
Springs, City, Mannford, Springs, Nederland, Lyndon, Rapids, Ellyn,
Okla. Penn. Okla. Okla. Tx. Ill. Mich. Ill.
----- ----- ----- ----- --- ---- ----- ----
Cold Drawing X X
Slitting X X
Welding X X X
Annealing X X X X X
Straightening X X X
Cut-to-Length X X X X X X X X
Integral Finning X
Electronic Non-
Destructive Testing:
Eddy Current X X X
Flux Leakage X
Ultra-Sonic X X
Hydro Static-
Testing X X X
Stenciling X X X
Bending X X X
Bar Coding X X X X X
Computerized Shop-
Floor Control X X X X X
Metallurgical Lab &
Spectrometer X
Statistical Process
Control X X X
INDUSTRY SEGMENTS
The Company has two reportable segments: tubing products and QuickWater,
representing the Company's two strategic business units offering different
products. The Company internally evaluates its business by facility, however,
because of the similar economic characteristics of the tubing operations,
including the nature of products, production processes and customers, those
operations have been aggregated for segment reporting purposes. See Footnote
12 to the financial statements for additional information regarding segments.
PRODUCTS
Manufactured Tubing Products
The Company produces tubing for a wide variety of markets and end-use
applications. The Company seeks to identify niche markets and customers that
have been serviced by high cost and low service competitors. The heat
exchanger and boiler tube markets are examples of the Company achieving
significant penetration following this strategy. Management believes that
Webco is a domestic market leader in the manufacture of welded carbon steel
heat exchanger and boiler tubing, and that it is the leading supplier of
stainless steel tubing for certain niche applications. The Company continues
to target the carbon mechanical and stainless steel tube markets for future
growth. The Company is building its market share for mechanical tubing through
its low cost structure and high product quality, together with the Company's
commitment to customer service. A detailed description of the Company's
Manufactured Tubing Products by the four major end-use markets follows:
Heat Exchanger Tubing: Most of the tubing the Company manufactures for
this market comes directly from the weld mill process. The Company believes it
is currently a market leader in the manufacture of welded carbon steel heat
exchanger tubing in the United States. The Company's technological investments
in stainless steel tube welding have enabled it to focus on growing its
stainless steel heat exchanger business. The Company has also been focusing
efforts on developing its "brokered" heat exchanger business, which consists of
steel heat exchanger tubing products not manufactured by the Company. Due to
the Company's leading market position, the Company expects growth in welded
carbon steel heat exchanger products to come from growth in the total market,
while growth in stainless steel and brokered heat exchanger products will come
from capturing additional market share. The Company believes that its
distribution facilities in Sand Springs, Oklahoma and Nederland, Texas, are
critical to the Company's overall heat exchanger strategy, and when combined
with the breadth of heat exchanger tubing products the Company can offer, gives
the Company a significant competitive advantage over other manufacturers.
Heat exchangers generally fall into two broad categories; shell and tube,
and air-cooled. Shell and tube heat exchangers are used to control
temperatures or to recover waste heat in, among other things, power stations,
petrochemical plants, and refineries. Air-cooled heat exchangers are used to
dissipate heat generated by industrial processes in, among other things, gas
compressor stations and petrochemical plants. The Company's products are
suitable for both shell and tube and air-cooled heat exchangers.
The heat exchanger industry over the two years has been impacted by low
demand in the petrochemical industry and low cost foreign imports (including
both raw coils and finished tubes and pipe), which have created historically
low pricing and a highly competitive sales environment. The Company expects
that its additional capacity scheduled to come on-line early in calender 2001,
will enable it to better realize the volume benefits associated with improving
demand in the welded carbon steel heat exchanger market.
Carbon Steel Boiler Tubing: The Company produces welded carbon steel
boiler tubing from both the Sand Springs, Oklahoma, and Oil City, Pennsylvania
facilities. This capability enables the Company to cost-effectively serve this
market throughout the continental United States and eastern Canada. The
Company is a market leader in the manufacture of welded carbon steel boiler
tubing.
The Company's products are used for the manufacture and maintenance of
boiler systems for utilities, waste-heat recovery units, industrial and
commercial facilities, and co-generation plants. While maintenance is an
ongoing requirement, new boiler manufacturing generally depends on industrial
plant expansion and construction of new energy production facilities.
Stainless Tubing: The Company serves five sub-markets within the small
diameter welded stainless tubing category: instrumentation tubing, stainless
pipe, mechanical tubing, heat exchanger tubing, and other tubing. The end uses
for these products include appliances, industrial plant piping systems,
instruments for the petrochemical industry, and a variety of other capital
goods applications. The Company is a small, niche producer, due to both
product size and capacity constraints. Over the past 3 years, the Company has
nearly quadrupled its stainless capacity and plans to continue aggressive
growth in the above product lines.
The stainless pipe and tube industry over the last three years has been
impacted by high levels of low cost foreign imports (including both raw coils
and finished tubes and pipe), which have created historically low pricing and
a highly competitive sales environment.
Mechanical Tubing: Mechanical tubing includes both as-welded and cold
drawn tubing. Most of the products the Company manufactures from its cold draw
processes are for mechanical tube applications. The end-uses for these
products are very diverse and include hydraulic cylinders, automotive
components, appliances, farm equipment, and a wide variety of consumer durables
(such as bicycles and lawnmowers) and capital goods. The Company is a
relatively small producer in this market, but continues to pursue opportunities
for growth.
In conjunction with the increased capabilities of Mill 3 and the completed
expansion in Oil City, the Company has targeted the mechanical tubing market as
a growth area over the next several years. This market continues to undergo a
major change in which final assembly manufacturers (automotive, appliance,
etc.) outsource component parts and emphasize just-in-time inventory management
to reduce production costs. Webco believes that this market, which is largely
comprised of original equipment manufacturers ("OEMs"), provides an opportunity
for the Company to gain market share by utilizing its technological
capabilities to offer superior quality, on-time delivery, customer service,
and customized products at competitive prices.
Other Tubing Products
The Company sells a variety of other tubing products, primarily through
its subsidiary, P&J. Other Tubing Products consist of tubular goods made of
stainless and carbon steel, copper, brass, aluminum, and surgical steel
purchased from other manufacturers. These products come in a wide range of
sizes and are used in a variety of applications. In many cases, the Company
provides just-in-time inventory management for its customers.
QuikWater
The Company's QuikWater division manufactures and sells a patented direct
contact water heater. The water heater generates hot water on demand and has
significant energy saving benefits coupled with unique environmental
advantages. It can be used in a variety of commercial applications such as
food processing, manufacturing, health care, construction, and other markets
where a high volume of hot water is required.
Quarterly Effects and Seasonality
Order rates generally tend to be lower during late summer as many of the
Company's customers schedule plant shutdowns for vacations. In addition, the
Company experiences some seasonality in stainless during its third fiscal
quarter, which may result in reduced net sales and income for that period.
Backlog
The Company's firm backlog of orders at July 31, 2000 and 1999 were $ 17.1
million and $25.9 million, respectively. Orders, including a portion of the
orders considered firm, are generally cancelable by the customer until work has
commenced and the Company has committed resources; thereafter, orders are
generally cancelable by the customer only upon payment of a cancellation
penalty.
Competition
Specialty steel tube manufacturing is a highly competitive market in which
companies compete on the basis of price, quality, service and ability to
deliver orders on a timely basis. Public data concerning the size of the
markets in which the Company participates is not readily available since many
of the large competitors are privately held. The Company believes that it is
the domestic market share leader in welded carbon heat exchanger tubing, welded
carbon boiler tubing, and certain stainless steel applications. Although the
Company has a small share of the mechanical tubing market, management believes
that it is well positioned to increase its market share over the next several
years.
The Company's major competitors include Vision Metals, Inc. for carbon
heat exchanger tubing, Plymouth Tube Company for carbon boiler tubing,
Damascus/Bishop Tube, Inc. and Gibson Tube, Inc. for stainless products, and
Copperweld LTV, Pittsburgh Tube Company and Lone Star Steel Company for
mechanical tubing. Certain of these competitors are larger and have access to
greater financial resources than the Company. Most of these competitors are
unionized.
The Company believes that its non-union status, geographic balance,
focused niche strategy, product quality, customer service and continued
emphasis on technical innovations position it to compete effectively within
each of its niche markets.
Quality Control
The supply of quality products and service is critical to the Company's
success. To help foster continuous improvements in quality and service, the
Company, through its corporate quality management department, instituted a
total quality management system based upon ISO 9000 quality system standards.
In early 1994, the Company achieved ISO 9002 certification at its Sand Springs,
Oklahoma manufacturing facility. ISO 9002 certification at its Oil City,
Pennsylvania manufacturing facility was achieved in early 1995. In May 2000,
the Company achieved ISO 9002 certification at its Mannford, Oklahoma
manufacturing facility. The Company has obtained QS-9000 certification at its
Sand Springs, Oklahoma, Oil City, Pennsylvania and Mannford, Oklahoma
facilities. In support of the total quality management system, the Company has
created an environment that emphasizes and utilizes teamwork to support
continuous improvement of quality and service.
Fundamental to the Company's quality system is the control of the product
and process, from raw material procurement to the ultimate delivery of finished
goods to the Company's customers. On a test basis, physical and chemical
analyses are performed on raw materials to verify that their mechanical and
dimensional properties, cleanliness, and surface characteristics meet the
Company's and industry requirements. The Company has also developed stringent
process controls, including Statistical Process Control, non-destructive
testing methods, and standardized operating and inspection procedures, to
provide assurance of quality, and to ensure that the customer's requirements
are met throughout the manufacturing process.
Suppliers
The Company purchases steel sheet coil produced by a number of primary
steel producers including, but not limited to, Wheeling-Pittsburgh Steel Corp.
and Nucor for carbon steel, and J & L Specialty Products Corporation and
Allegheny Teledyne Inc. for stainless steel. In addition, Webco purchases
from intermediate steel processors and brokers in order to benefit from their
purchasing power or for their specialized processing capabilities. Webco
monitors and purchases raw material periodically from foreign sources, as
conditions dictate, to obtain a competitive landed cost. The Company orders
steel to specified physical characteristics and chemistry. By purchasing in
large quantities at consistent predetermined intervals, Webco is able to obtain
quality raw materials at competitive prices. All increments of the cost of
purchasing and landing steel are continuously monitored, reviewed and acted
upon. Webco believes that it is not dependent on any one of its suppliers for
raw materials, although as demonstrated by the Wheeling-Pittsburgh labor strike
during much of fiscal year 1997, interruptions in supply from its main
suppliers may impact the landed cost of new purchases.
Webco understands that the Company's supplier base for materials is
critical to its economic health. Constant effort is directed towards
developing long-term partners who can provide acceptable quality, competitive
prices, dependable delivery, and are, themselves, economically stable. Many of
Webco's suppliers have been supplying materials to the Company for 15 to 20
years.
Marketing and Customer Service
The Company's products and services are sold predominately by the
Company's inside and outside sales personnel.
The Company's sales and marketing efforts for its manufactured products
are directed by a vice president of sales and marketing, the President of P&J,
and Webco's product sales managers. These efforts are supported by its
distribution organization, internal sales staff and technical services group.
The Company also emphasizes the use of its technical and engineering support
staff in its product development and marketing efforts. The Company's
technical services, operating, engineering, quality, sales, product planning
and purchasing staffs work closely with its customers and suppliers to develop
products that meet specific customer applications. Variables in the product
development process include the steel's microstructure, chemistry, mechanical
properties, surface finish, machinability, and product consistency. The
Company believes this process is essential to its sales effort and provides the
Company with a competitive advantage.
Sales of the Company's Other Tubing Products are directed by the President
of P&J, and its sales staff, headquartered in Glen Ellyn, Illinois. The
Company's Other Tubing Products line and P&J's other sales representative
accounts constitute over 50% of P&J's sales effort.
Customers and Distribution
The Company manufactures and distributes specialty steel tubular product
for sale to a diverse group of more than 1,300 customers. No single customer
represents in excess of 6% of the Company's net sales. The Company's ten
largest customers represent approximately 30% of net sales. More than 80% of
the Company's sales are directly to industrial customers, including
manufacturers of heat exchangers, high efficiency home heating furnaces,
appliances, automotive components, power generation equipment, waste heat
recovery systems, industrial and commercial boilers, and other consumer durable
goods.
While the Company ships product throughout North America, many of its
markets and customers are located within a 500-mile radius of its manufacturing
and distribution locations. As it concerns these markets and customers, this
geographic advantage places the Company in a more cost competitive position
relative to many of its competitors. The Company transports product for local
delivery via Company-owned or leased vehicles. Longer distance deliveries are
generally made via independent trucking firms.
The Company offers its finished product for shipment directly from its
three manufacturing locations. In addition, the Company also inventories
finished goods and functions as its own distributor in some of its markets.
Such markets and customers are served on a just-in-time basis from the
Company's distribution locations in Oklahoma, Texas, Illinois and Michigan.
Finished goods inventories for distribution generally are suitable for sale to
many customers and generally are not unique to a specific customer's needs.
The Company believes that its long-term relationships with many of its
customers are a significant factor in its business and that pricing, quality,
service and the ability to deliver orders on a timely basis are the most
critical factors in maintaining these relationships. Company executive
officers actively participate in the Company's marketing efforts and have
developed strong business relationships with senior management of many of the
Company's principal customers.
Government Regulation
The Company's distribution and manufacturing facilities are subject to
many federal, state, and local requirements relating to the protection of the
environment. The Company continually examines ways to reduce emissions and
waste and reduce costs related to environmental compliance. The Company has an
in-house environmental engineer leading the Company's environmental program.
Management's philosophy is to implement environmental controls that meet or
exceed current and foreseeable legal requirements. Management believes the
Company is in material compliance with all environmental laws, does not
anticipate any material expenditure to meet environmental requirements, and
generally believes that its processes and products do not present any unusual
environmental concerns. See "Item 3. Legal Proceedings."
The Company's operations are also governed by laws and regulations
relating to workplace safety and worker health, principally the Occupational
Safety and Health Act and regulations thereunder which, among other
requirements, establish noise and dust standards. Management believes it is in
material compliance with these laws and regulations and does not believe that
future compliance with such laws and regulations will have a material adverse
effect on its results of operations or financial condition.
Employees
As of September 30, 2000, the Company employed 790 people. None of the
Company's employees are covered by collective bargaining agreements. The
Company has never experienced a significant work stoppage and considers its
employee relations to be good.
FORWARD-LOOKING STATEMENTS
Certain statements in this Annual Report on Form 10-K, including statements
preceded by, or predicated upon the words "expects" and "believes", constitute
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Such forward-looking statements involve known
and unknown risks, uncertainties and other important factors that could cause
the actual results, performance or achievements of the Company, or industry
results, to differ materially from any future results, performance or
achievements expressed or implied herein. Such risks, uncertainties and
factors include, among others:
General Economic and Business Conditions
Many of the Company's products are sold to industries that experience
significant fluctuations in demand based on economic conditions or other
matters beyond the control of the Company. No assurance can be given that the
Company will be able to increase or maintain its level of sales in periods of
economic stagnation or downturn.
Competition from Imports
The level of imports of tubular products affects the domestic tubular
products market, which has varied significantly over time. High levels of
imports may reduce the volume sold by domestic producers and depress selling
prices. In addition, the strength of the U.S. Dollar and volume motives of some
foreign importers may create circumstances where product pricing is at levels
that are marginally profitable or even unprofitable. The Company believes
that import levels and import pricing are affected by, among other things,
overall worldwide demand for tubular products, global economic conditions, the
trade practices of and government subsidies to foreign producers, and the
weakness or absence of governmentally imposed trade restrictions in the United
States. Given the uncertainty in certain economies of Asia, South America and
Eastern Europe, competition from foreign imports should be expected to continue.
Changes in Manufacturing Technology
Over the past 10 years, there have been significant advances in the
technology relating to the manufacture of carbon and stainless steel tubing.
Such advances have impacted the speed at which tubing can be manufactured, the
quality of the tubing, and the types and densities of materials that can be
welded into tubes for advanced manufacturing processes. In many circumstances,
maintaining current manufacturing technologies is necessary to be competitive
with other domestic producers and foreign imports or to be able to provide
goods for customers' advancing manufacturing needs and processes. Maintaining
current manufacturing technologies and capabilities requires investment of
capital. Manufacturers that do not maintain current technologies may be
rationalized by the industry as a result of their inability to compete against
more efficiently priced products.
Industry Capacity
The Company and many of its competitors in both the stainless and carbon
steel tubing markets have expanded production capacity over the past decade
and continue to do so in connection with the growth in product demand and
benefits related to current manufacturing technology. Continued significant
expansion could result in industry over-capacity. Over capacity could also
result from a sudden decrease in demand or a significant increase in foreign
imported supply.
Domestic Competition
Specialty steel tube manufacturing is a highly competitive market in which
companies compete on the basis of price, quality, service and ability to fill
orders on a timely basis. The Company has different competitors within each of
its markets served. Certain of these competitors are larger and have greater
financial resources than the Company. Sales of some of the Company's products
represent a high percentage of the market demand for these products, and could
be targeted by competitors.
Raw Material Costs and Availability
The Company's largest component of cost of sales is raw material costs.
These costs can vary over time due to changes in steel pricing which are
influenced by numerous factors beyond the control of the Company, including
general economic conditions, foreign imports, domestic competition, labor
costs, import duties and other trade restrictions. Typically, the Company
passes on these changes in cost to customers. However, reductions in the
Company's raw material costs may lag behind pressure on the Company's sales
prices or increases in raw material costs may precede increases in the
Company's sales prices, thus affecting the Company's profit margins.
Loss of Significant Customers and Customer and Vendor Work Stoppages
The Company sells its tubular products to a diverse group of more than
1,300 customers. Although no single customer represents in excess of 6% of the
Company's 2000 net sales, and no one end-use sector represents more than 25%
of 2000 net sales, the loss of any significant customer, or a work stoppage at
a significant customer or in an important end-use sector, such as automotive,
could have an adverse effect on the Company's operating results.
Technical and Data Processing Capabilities of Customers and Vendors
Failure by the Company's customers and vendors to find adequate solutions
to any technical and data processing issues they may have could result in
customers having a significant interruption in their buying patterns and
volumes, and vendors being unable to deliver product required for the Company's
manufacturing processes in a timely manner.
ITEM 2. PROPERTIES
The Company's principal properties presently consist of three
manufacturing plants and five distribution facilities. The following sets
forth the location, area, and whether the property is owned or leased for each
existing facility:
Location Area Owned or Leased
-------- ---- ---------------
Sand Springs, Oklahoma 281,000 square feet Owned
Manufacturing Facility 26 acres
Sand Springs, Oklahoma 50,000 square feet Owned
Distribution Facility 18 acres
Sand Springs, Oklahoma 19,850 square feet Owned
QuickWater Facility 4 acres
Mannford, Oklahoma 138,000 square feet Owned
Manufacturing Facility 13 acres
Nederland, Texas 25,200 square feet Long-term lease with a
Distribution Facility purchase Option of the
greater of 93% of
FMV or $475,000
Oil City, Pennsylvania 205,000 square feet Owned
Manufacturing Facility 8 acres
Titusville, Pennsylvania 30,600 square feet Long-term lease
Manufacturing Facility
Tulsa, Oklahoma 24,400 square feet Long-term lease with a
Corporate Offices purchase option of
$750,000
Tulsa, Oklahoma 28,000 square feet Long-term lease
Finning Facility
Glen Ellyn, Illinois 25,700 square feet Long-term lease
P&J Corporate Offices
and Distribution Facility
Lyndon, Illinois 33,700 square feet Long-term lease
Distribution Facility
Grand Rapids, Michigan 55,000 square feet Long-term lease
Distribution Facility
The Company considers all of its properties, both owned and leased,
together with the related machinery and equipment contained therein, to be well
maintained, in good operating condition, and suitable and adequate to carry on
the Company's business.
ITEM 3. LEGAL PROCEEDINGS
In August 1997, the Company filed an action, Webco Industries, Inc. vs.
Thermatool Corporation and Alpha Industries, Inc., relating to certain cut-off
equipment sold to the Company and installed on Mill 3, which did not perform to
specifications. The case, filed in the United States District Court for the
Northern District of Oklahoma (Case No. 97-CV-708H (W)), sought recoveries
including, but not limited to, the cost of the equipment and other incidental
and consequential damages, including lost profits, suffered by the Company. On
May 27, 1999 a jury awarded the Company $1.1 million in its claims against
Thermatool. On December 1, 1998, the court ruled that the Company could not
collect lost profits and certain other incidental and consequential damages,
and limited the Company's possible recovery to the purchase price of the
equipment plus the cost of improvements and interest. The damages awarded by
the jury, accordingly, do not include lost profits by the Company. Now that
the first trial has been decided in the Company's favor, the Company has
appealed the pre-trial order that prevented the Company from recovering for
lost profits, and has appealed the trial court's denial of attorneys' fees and
pre-judgment interest. There can be no assurances that the Company will be
successful on appeal or that if successful, lost profits or other damages
awarded by the appeals court or in the succeeding trial, if any, will be
commensurate with actual lost profits and damages and expenses suffered by the
Company. Thermatool has appealed the jury's verdict and there can be no
assurances as to what the outcome of that appeal will be.
The Company is also a party to various other lawsuits and claims arising
in the ordinary course of business. Management, after review and consultation
with legal counsel, considers that any liability resulting from these matters
would not materially affect the results of operations or the financial position
of the Company. The Company maintains liability insurance against risks
arising out of the normal course of business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to Webco security holders during the
fourth quarter of fiscal year 2000.
PART II
ITEM 5. MARKET FOR REGISTRANTS COMMON STOCK
AND RELATED STOCKHOLDER MATTERS
Webco's common stock is traded on the American Stock Exchange ("AMEX")
under the symbol "WEB." At the close of business on September 15, 2000, there
were 282 holders of record of Webco's common stock. The quarterly prices of
Webco's common stock were as follows:
Fiscal Year 2000: High Low
---- ----
Fourth Quarter 4 1/4 2 11/16
Third Quarter 4 15/16 3 3/4
Second Quarter 3 7/8 2 1/2
First Quarter 4 7/8 2 3/4
Fiscal Year 1999:
Fourth Quarter 5 1/2 4 9/16
Third Quarter 6 3/16 3 13/16
Second Quarter 7 7/16 5 7/8
First Quarter 8 5 1/2
Dividends
The Company currently intends to retain earnings to support its growth
strategy and reduce debt and does not anticipate paying dividends in the
foreseeable future. The Board of Directors may reconsider or revise this
policy from time to time based upon conditions then existing, including the
Company's results of operations, financial condition, and capital requirements,
as well as other factors the Board of Directors may deem relevant. Under the
Company's loan agreement, the Company may not pay dividends without the lenders
consent.
ITEM 6. SELECTED FINANCIAL DATA
The following table presents selected financial information for the
Company as of the end of and for each of the five years in the period ended
July 31, 2000, which has been derived from the audited Financial Statements
of the Company. In fiscal year 1998, Webco merged with Phillip & Johnston,
Inc. ("P&J"). Because the merger was accounted for as a pooling of interests,
financial results for the 1996 through 1998 periods are presented as though the
companies have always been combined.
The selected financial data should be read in conjunction with the
Financial Statements of the Company and notes thereto and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
appearing elsewhere in this Form 10-K.
WEBCO INDUSTRIES, INC. AND SUBSIDIARY
Selected Financial Data
For the Years Ended July 31,
(Dollars in thousands, except per share data)
Income Statement Data: 2000 1999 1998 1997 1996
----- ----- ----- ----- -----
Net sales $140,920 $134,744 $151,431 $128,593 $112,525
Gross profit 19,368 21,353 28,486 20,228 17,159
Income from operations 2,346(1) 5,564 11,305 7,234(2) 7,145
Income before income
taxes (1,646) 3,012 9,009 5,187 4,893
Net income (loss) (3) (1,025) 1,876 6,207 3,931 3,767
Net income (loss) per share (3):
Basic (.14) .26 .87 .55 .53
Diluted (.14) .26 .86 .55 .53
Pro forma net income (4) 5,511 3,179 2,990
Pro forma net income per
share (4):
Basic .77 .44 .42
Diluted .76 .44 .42
Balance Sheet Data:
Working capital $30,129 $32,346 $30,861 $33,837 $22,011
Total assets 130,123 120,481 111,758 102,142 86,888
Long-term debt (net of
current portion) 43,979 39,746 32,894 34,470 19,797
Stockholders' equity 48,648 49,673 48,245 45,220 42,913
(1) Includes a $1,400,000 ($868,000, or $.12 per diluted share after tax)
charge related to the write-off of certain QuikWater long-term assets
and excess tubing equipment.
(2) Includes a $884,000 ($548,000, or $0.08 per diluted share after tax)
charge related to the replacement and write-off of faulty equipment on the
Company's Mill 3.
(3) P&J was an S-Corporation for Federal and state income tax purposes through
June 29, 1998, and accordingly did not incur any Federal or state income
taxes prior to that date.
(4) The 1996 through 1998 periods presented have been adjusted on a pro forma
basis for assumed Federal and state income taxes for P&J, which had not
previously recognized income taxes due to their S-Corporation status. Pro
forma income taxes were based upon the statuary (Federal & state) tax rate
of 38 percent.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the "Selected
Financial Data" and the Financial Statements of the Company and notes thereto
appearing elsewhere in this Form 10-K.
Overview
The Company's philosophy is to pursue growth and profitability through the
identification of niche markets that preferably involve specialty tubular
products that require a high level of value engineering and can be dominated
from an industry or customer standpoint. The Company uses its quality
standards, customer service and manufacturing technology to achieve such market
penetration.
During the three year period ended July 31, 2000, the Company spent $33.7
million on capital projects, or $4.76 per diluted share. This included several
major projects, such as expansion and installation of additional mills at the
stainless facility, expansion and installation of new equipment at Oil City,
expansion and improvements at the Sand Springs facility, and expenditures
towards the purchase and installation of an Enterprise Resource Planning
("ERP")system.
Results of Operations
The following table sets forth certain income statement data for each of
the three years in the period ended July 31, 2000 (certain amounts may not
calculate due to rounding):
2000 1999 1998
Dollar % of Dollar % of Dollar % of
Amount Net Sales Amount Net Sales Amount Net Sales
------ --------- ------ --------- ------ ---------
(Dollars in Millions)
Net sales $140.9 100.0% $134.7 100.0% $151.4 100.0%
Gross profit 19.4 13.8 21.4 15.9 28.5 18.8
Selling, general and
administrative expenses 15.6 11.1 15.8 11.7 17.2 11.3
Income from operations 2.3 1.6 5.6 4.2 11.3 7.5
The following discussions of sales levels, prices and gross profit
revolve around the Company's Manufactured Tubing Products (carbon and stainless
steel tubing from its three plants in Oklahoma and Pennsylvania), Other Tubing
Products (purchased tubular goods made of stainless steel, carbon steel,
copper, brass and surgical steel) and QuikWater.
Fiscal 2000 Compared with Fiscal 1999
Manufactured Tubing Product sales increased $6.7 million, or 5.5 percent,
to $125.8 million in 2000 from $119.2 million in 1999. The increase in net
sales reflects a 7.0 percent increase in the tonnage of tubing sold during
2000, which was partially offset by a 1.3 percent decrease in the average net
sales price per ton. The overall increase in the tonnage of tubing sold
reflects the growth in the Company's stainless, boiler and OEM mechanical
tubing markets. The decrease in the average net selling price is a combination
of a change in sales mix and eroded pricing in the heat exchanger market and
general mechanical tubing products.
Gross profit for Manufactured Tubing Products decreased to $16.4 million,
or 13.0 percent of net sales, in 2000 from $18.4 million, or 15.4 percent of
net sales, in 1999. This decrease is a function of the 1.3 percent decline in
average net selling price per ton, noted above. This combined with an increase
of 10.9 percent in the average manufactured cost per ton of tubing sold caused
by increased raw material prices.
Other Tubing Products sales are made primarily by Webco's subsidiary, P&J.
Sales of these products increased 3.1 percent to $12.5 million in 2000 from
$12.1 million in 1999. Gross profit from Other Tubing Products increased to
$2.7 million, or 21.6 percent of net sales, in 2000 from $2.6 million, or 21.4
percent of net sales, in 1999. The slight increase in sales and gross profit
was the result of volume increases and a change in sales mix from the prior
year period.
Sales for QuikWater decreased 23.5 percent to $2.6 million in 2000 from
$3.4 million in 1999. Gross profit for QuikWater was $263,000, or 10.2 percent
of net sales, in 2000 as compared with $388,000, or 11.4 percent of net sales,
in 1999. The decrease in sales is a result of a decline in demand in the food
processing industry and pending environmental standards in California. As a
result of low volumes, gross profit percentages remained low due to the
under-utilization of available manufacturing capacity. Beginning in late 2000,
the Company contracted with an entity owned by the majority stockholders to
subcontract the production of the QuikWater units. Management believes this
will enable the company to achieve improved margins by not having to incur the
costs of personnel and overhead.
During the fourth quarter of fiscal 2000, the Company recorded a $986,000
pre-tax charge related to the write-off of QuikWater intangible, and certain
other long-lived, assets. QuikWater continues to operate and the remaining
asset values are being depreciated as part of the normal course of business.
In addition, the Company recorded a $414,000 pre-tax charge related to the
write-down of underutilized tubing equipment that the Company anticipates
selling in the near future.
Selling, general and administrative expenses decreased 1.3 percent to
$15.6 million in fiscal 2000 from $15.8 million in fiscal 1999. The decrease
in the current year is primarily the result of an approximately $930,000
decrease in legal expenses, primarily related to the Thermatool litigation and
labor related matters, and a decrease of $145,000 in profit sharing to
employess. These decreases were principally offset by an increase of
approximately $435,000 in depreciation related to the ERP system and $465,000
of additional information technology expenses incurred in support of the new
ERP system.
Interest expense for fiscal 2000 increased to $4.0 million (net of
$313,000 capitalized) from $2.6 million (net of $437,000 capitalized) in fiscal
1999. The increase in interest prior to interest capitalization is the result
of the average level of debt under the bank Loan and Security Agreement
increasing $9.3 million to $44.7 million for 2000 as compared with $35.4
million for 1999. In addition, the related average interest rate increased to
8.8 percent in 2000 from 7.2 percent in 1999. The Company has historically
elected for its term debt and a significant portion of its outstanding revolver
to bear interest at a floating rate based on LIBOR. LIBOR, much like the prime
rate, experienced increases during fiscal 2000. Higher borrowing levels have
resulted from increased inventories, implementation of the ERP system, and the
expansions in Oil City, Pennsylvania, and Mannford, Oklahoma.
Fiscal 1999 Compared with Fiscal 1998
Manufactured Tubing Product sales decreased $18.8 million, or 13.6
percent, to $119.2 million in 1999 from $138.0 million in 1998. The decrease
in net sales reflects a 14.7 percent decrease in the tonnage of tubing sold
during 1999, which was partially offset by a 1.2 percent increase in the
average net sales price per ton. The overall decrease in the tonnage of tubing
sold reflects a decrease in sales of carbon tubing products, which was the
result of among other things, inventory reductions by distributors, low priced
foreign imports, and low demand for foreign exports. The increase in the
average net selling price is a combination of a change in sales mix and
improved pricing structures in certain stainless products, which more than
offset the decrease in the net sales price per ton obtained for carbon
products.
Gross profit for Manufactured Tubing Products decreased to $18.4 million,
or 15.4 percent of net sales, in 1999 from $25.4 million, or 18.4 percent of
net sales, in 1998. This decrease is a function of the decrease in the tonnage
sold combined with poor pricing in the market. The slight overall increase in
average price per ton is a result of sales mix rather than an indication of
improved pricing.
Other Tubing Products sales are made primarily by Webco's subsidiary, P&J.
Sales of these products increased 2.5 percent to $12.1 million in 1999 from
$11.8 million in 1998. Gross profit from Other Tubing Products decreased to
$2.6 million, or 21.4 percent of net sales, in 1999 from $3.3 million, or 28.1
percent of net sales, in 1998. The increase in sales is primarily the result
of volume increases. The decrease in gross profit was the direct result of
pricing pressure in the market place, which necessitated pricing reductions in
order to maintain customers, and a change in sales mix from the prior year
period.
Sales for QuikWater increased 113.6 percent to $3.4 million in 1999 from
$1.6 million in 1998. The increase is the result of a concentrated sales
effort and increased recognition in the market place. Gross profit for
QuikWater was $388,000, or 11.4 percent of net sales, in 1999 as compared to a
loss of $247,000, or -15.4 percent of net sales, in 1998. The increase is a
reflection of increased sales and manufacturing fixed and semi-fixed costs
being spread over higher volumes.
Selling, general and administrative expenses decreased 7.9 percent to
$15.8 million in fiscal 1999 from $17.2 million in fiscal 1998. The decrease
in the current year is primarily the result of a $1.6 million decrease in
profit sharing and bonuses to employees and the $565,000 of expenses incurred
in 1998 related to the merger with P&J. The decreases are principally offset
by an increase of approximately $600,000 in depreciation of capitalized costs
related to the installation of the Enterprise Resource Planning software.
Interest expense for fiscal 1999 increased to $2.6 million (net of
$437,000 capitalized) from $2.3 million (net of $517,000 capitalized) in fiscal
1998. The increase in interest, prior to interest capitalization, is the
result of the average level of debt under the bank Loan and Security Agreement
being $35.4 million for 1999 as compared with $31.6 million for 1998. This
increase was partially offset by a decrease in the average borrowing rate to
7.2 percent in 1999 from 7.72 percent in 1998.
Liquidity and Capital Resources
Net cash provided by operations was $4.2 million, $8.6 million and $15.1
million in fiscal 2000, 1999 and 1998, respectively. Accounts receivable
increased in 2000 and 1998 primarily as a result of the increase in sales from
the prior year. Inventories increased in 2000 and 1999, however they decreased
slightly in 1998. The increase in inventory in 2000 and 1999 was partly the
result of the Company's ability to make strategic volume purchases in
anticipation of rising prices and the result of an overall increase in raw
material prices. Accordingly, accounts payable increased in 2000 and 1999
primarily as a result of the increase in inventory. Over the past three years,
the Company has on average turned its steel tube inventories approximately 4.1
times per year.
Net cash used in investing activities was $10.5 million, $12.9 million and
$11.9 million in fiscal 2000, 1999 and 1998, respectively. During 2000, the
Company added a new mill and upgraded technology on existing mills at the
stainless plant, completed the installation of its ERP system, and continued
the expansion of facilities and machinery at its Oil City plant. During 1999
the Company added new mills at its stainless plant, continued the development
and installation of the ERP system, and expanded facilities and operations at
its Oil City plant. In Fiscal 1998, the Company completed the expansion of its
Sand Springs shipping facility, added new stainless mills at its stainless
plant, completed the renovation of the building it is leasing to house its
corporate headquarters, and initiated the acquisition, development and
installation of new financial and operational software.
The Company's capital requirements have historically been to fund
equipment purchases and for general working capital needs resulting from the
growth that the Company has experienced. The Company has followed an aggressive
capital expenditure plan as part of its growth strategy and to enable it to
continue to be a leader in tubular manufacturing technologies. The Company is
currently completing the expansion in Oil City and continuing to evaluate
opportunities for its stainless tubing facility, while focusing on debt
reduction and working capital management. The Company currently intends to
retain earnings to support this strategy and does not anticipate paying
dividends in the forseeable future.
The Company's financing arrangements provide for a term loan of $25
million, a line of credit of $25 million and a capital expenditure ("CAPEX")
facility in the amount of $5 million to finance equipment at the Oil City,
Pennsylvania plant. As of July 31, 2000, the Company had $25 million
outstanding on the term loan, $17.7 million under the revolving line of credit
and $2.9 million outstanding on the CAPEX facility. These loans mature on
August 31, 2002, and are collateralized by substantially all of the Company's
assets other than the Sand Springs real estate. The Company may have
borrowings and outstanding letters of credit ($1,575,000 at July 31, 2000)
under the revolving credit facility up to the lesser of $25 million or an
amount determined by a formula based on the amount of eligible inventories and
accounts receivable. At July 31, 2000, $5.4 million was available for borrowing
under this line of credit and $2.1 million was available for borrowing under
the CAPEX loan. Beginning in August 2000, principal payments of $208,000, plus
interest, will be due on the term loan each month until maturity. Beginning in
November 2000, principal payments on the CAPEX facility of $83,000, plus
interest, will be due each month until maturity.
During fiscal year 2000 and as of July 31, 2000, the Company was in
non-compliance with certain of the financial covenants contained in the loan
agreement and on November 13, 2000 obtained waivers from the lenders. In
addition to granting the waivers, the lenders modified and reduced the debt
coverage and indebtedness ratio loan covenants up to January 31, 2002. An
additional covenant was added requiring the Company to maintain a minimum
borrowing base availability without considering the $25 million revolving loan
cap. The covenant levels for all periods including and subsequent to January
31, 2002 are unchanged by the amendment.
The Company has arranged financing with various public agencies related to
the Oil City facility, of which, $1.6 million is outstanding and an additional
$1.5 million remains available for borrowing as of July 31, 2000. The
consumation of the remaining available public agency borrowings are conditional
upon certain approvals from the primary lender which have not been obtained as
of November 13, 2000 and there are no assuarances that the approvals will be
obtained. The agency loans are collateralized by the underlying real estate
and/or equipment and the guarantee of the prinicpal stockholder/officer. The
notes mature over a 4 to 10 year period and bear interest at rates ranging
from 3 to 5 percent.
P&J has a line of credit agreement for $2,000,000 and a term loan of
$500,000 with its primary lender. As of July 31, 2000, the Company had $110,000
outstanding under the line of credit and $392,000 outstanding on the term loan.
The line of credit matures on November 30, 2000, and the term loan matures in
April 2004. Both loans are collateralized by P&J's assets. At July 31, 2000,
$1.9 million was available for borrowing under the line of credit.
In the past, the Company has funded its capital growth expenditures with
a combination of cash flow from operations and debt. The remaining available
borrowing on the CAPEX facility (approximately $2.1 million) is committed to
funding the purchase of ordered equipment for the Oil City plant. Additional
public agency funding will be used to pay down higher cost debt facilities.
Outstanding Litigation
On May 27, 1999, a jury awarded the Company $1.1 million in its claims
against a vendor of certain cut-off equipment. In a pre-trial order, the court
ruled that the Company could not collect lost profits and certain other
incidental and consequential damages, and limited the Company's possible
recovery to the purchase price of the equipment plus the cost of improvements
and interest. The vendor has appealed the jury's verdict and the Company has
appealed the pre-trial order. There can be no assurances as to what the
outcome of the appeals will be or that ultimate damages collected, if any, will
be commensurate with losses incurred by the Company. Please see Part I,
Item 3: "Legal Proceedings" of this annual report on Form 10-K for additional
information regarding this matter.
The Company is also a party to various other lawsuits and claims arising
in the ordinary course of business. Management, after review and consultation
with legal counsel, considers that any liability resulting from these matters
would not materially affect the results of operations or the financial position
of the Company. The Company maintains liability insurance against risks
arising out of the normal course of business.
Stock Repurchase Plan
In March 1999, the Company's Board of Directors approved a plan to acquire
up to $500,000 of its common stock. Of the approved $500,000 repurchase, the
Company acquired 95,000 shares of stock for approximately $448,000 during
fiscal year 1999. The Company currently does not plan on any additional
repurchases in the near-term.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Webco Industries, Inc.
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, stockholders' equity and cash
flows present fairly, in all material respects, the financial position of Webco
Industries, Inc. and subsidiary at July 31, 2000 and 1999, and the results of
their operations and their cash flows for each of the three years in the period
ended July 31, 2000, in conformity with accounting principles generally
accepted in the United States. In addition, in our opinion, the financial
statement schedule listed in the index appearing under item 14(a)(2), presents
fairly, in all material respects, the information set forth therein when read
in conjunction with the related consolidated financial statements. These
financial statements and financial statement schedule are the responsibility
of the Company's management; our responsibility is to express an opinion on
these financial statements and financial statement schedule based on our
audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States which require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
PricewaterhouseCoopers LLP
Tulsa, Oklahoma
September 21, 2000, except for the third
paragraph in Note 6(A), as to
which the date is November 13, 2000
WEBCO INDUSTRIES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
July 31, 2000 and 1999
(Dollars in thousands, except share amounts and par value)
2000 1999
------- -------
ASSETS
Current assets:
Cash $ 1,633 $ 180
Accounts receivable, net 17,536 17,179
Inventories 35,765 30,785
Prepaid expenses 435 289
Deferred income tax asset 2,047 3,013
------- -------
Total current assets 57,416 51,446
Property, plant and equipment, net 68,067 64,277
Notes receivable from related parties 1,801 1,824
Other assets, net 2,839 2,934
------- -------
Total assets $130,123 $120,481
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 17,938 $ 12,784
Accrued liabilities 5,259 5,421
Current portion of long-term debt 4,090 895
------- -------
Total current liabilities 27,287 19,100
Long-term debt 43,979 39,746
Deferred income tax liability 10,209 11,962
Commitments and contingencies (Note 8)
Stockholders' equity
Common stock, $.01 par value, 12,000,000 shares
authorized, 7,073,723 shares issued
and outstanding 71 71
Additional paid-in capital 35,732 35,732
Retained earnings 12,845 13,870
------- -------
Total stockholders' equity 48,648 49,673
------- -------
Total liabilities and stockholders' equity $130,123 $120,481
======= =======
[FN]
The accompanying notes are an integral part of the consolidated financial
statements.
WEBCO INDUSTRIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended July 31, 2000, 1999 and 1998
(Dollars and shares in thousands, except per share amounts)
2000 1999 1998
------- ------- -------
Net sales $140,920 $134,744 $151,431
Cost of sales 121,552 113,391 122,945
------- ------- -------
Gross profit 19,368 21,353 28,486
Selling, general and administrative expenses 15,622 15,789 17,181
Special item: asset write-off (Note 5) 1,400 - -
------- ------- -------
Income from operations 2,346 5,564 11,305
Interest expense 3,992 2,552 2,296
------- ------- -------
Income (loss) before income taxes (1,646) 3,012 9,009
Provision (benefit) for income taxes (621) 1,136 2,802
------- ------- -------
Net income (loss) $ (1,025) $ 1,876 $ 6,207
======= ======= =======
Pro forma net income (1) $ 5,511
=======
Net income (loss) per share:
Basic $ (.14) $ .26 $ .87
======= ======= =======
Diluted $ (.14) $ .26 $ .86
======= ======= =======
Pro forma net income per share(1):
Basic $ .77
=======
Diluted $ .76
=======
Weighted average shares outstanding:
Basic 7,074 7,135 7,169
======= ======= =======
Diluted 7,074 7,139 7,245
======= ======= =======
(1) Pro forma income taxes have been presented for 1998 to compensate for the
S-Corporation tax status of P&J and were calculated using an effective rate of
38 percent (34% Federal and 4% state).
The accompanying notes are an integral part of the consolidated financial
statements.
WEBCO INDUSTRIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Years Ended July 31, 2000, 1999 and 1998
(Dollars in thousands)
Additional Total
Common Paid-In Retained Stockholders'
Stock Capital Earnings Equity
------ ------- -------- ------
Balances, July 31, 1997 $ 72 $ 36,179 $ 8,969 $ 45,220
Distribution to shareholders - P&J - - (2,434) (2,434)
Elimination of duplicate equity resulting
From non-conforming fiscal years (Note 2) - - (748) (748)
Net income - - 6,207 6,207
----- ------- ------- -------
Balances, July 31, 1998 72 36,179 11,994 48,245
Purchases of common stock (Note 10) (1) (447) - (448)
Net income - - 1,876 1,876
----- ------- ------- -------
Balances, July 31, 1999 71 35,732 13,870 49,673
Net loss - - (1,025) (1,025)
----- ------- ------- -------
Balances, July 31, 2000 $ 71 $ 35,732 $ 12,845 $ 48,648
===== ======= ======= =======
The accompanying notes are an integral part of the consolidated financial
statements.
WEBCO INDUSTRIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended July 31, 2000, 1999 and 1998
(Dollars in thousands)
2000 1999 1998
------- ------- -------
Cash flows from operating activities:
Net income (loss) $ (1,025) $ 1,876 $ 6,207
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization 5,910 5,158 4,133
(Gain) loss on write-off and disposition
of property, plant and equipment (Note 5) 1,417 (10) 20
Deferred tax expense (benefit) (787) 1,069 2,576
(Increase) decrease in:
Accounts receivable (1,335) 2,211 (1,486)
Inventories (4,498) (3,010) 657
Prepaid expenses (146) (84) 158
Increase (decrease) in:
Accounts payable 4,335 2,907 (59)
Accrued liabilities 307 (1,536) 2,892
------- ------- -------
Net cash provided by operating activities 4,178 8,581 15,098
------- ------- -------
Cash flows from investing activities:
Capital expenditures (10,462) (12,555) (10,652)
Proceeds from sale of property, plant and equipment 107 21 26
Advances to stockholders - - (38)
Increase in other assets (98) (340) (1,282)
------- ------- -------
Net cash used in investing activities (10,453) (12,874) (11,946)
------- ------- -------
Cash flows from financing activities:
Proceeds from long-term debt 125,100 132,960 143,498
Principal payments on long-term debt (117,672) (126,495) (144,205)
Dividends paid - - (2,434)
Purchases of common stock (Note 10) - (448) -
Increase (decrease) in book overdrafts 300 (1,810) 53
------- ------- -------
Net cash provided by (used in ) financing activities 7,728 4,207 (3,088)
------- ------- -------
Net increase (decrease) in cash 1,453 (86) 64
Cash, beginning of period 180 266 202
------- ------- -------
Cash, end of period $ 1,633 $ 180 $ 266
======= ======= =======
Supplemental disclosure of cash flow information:
Interest paid, net of amount capitalized of $313,
$437 and $517 in 2000, 1999 and 1998, respectively $ 3,834 $ 2,664 $ 2,098
======= ======= =======
Income taxes paid $ 216 $ 467 $ -
======= ======= =======
The accompanying notes are an integral part of the consolidated financial
statements.
WEBCO INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include
the accounts of Webco Industries, Inc. ("Webco" or together with its
subsidiary, the "Company") and its wholly owned subsidiary Phillips & Johnston,
Inc. ("P&J"), a Chicago based sales organization and value-added processor of
tubular products. All significant intercompany accounts and transactions have
been eliminated in the accompanying financial statements.
NATURE OF OPERATIONS - Webco is a specialty manufacturer of high-quality carbon
and stainless steel tubing products designed to industry and customer
specifications. Webco's tubing products consist primarily of: heat exchanger
and welded carbon boiler tubing, stainless tube and pipe, and specialty carbon
mechanical tubing for use in consumer durable and capital goods. The Company's
subsidiary, P&J, represents several manufacturers who produce various non-
competing mechanical and specialty tubular products made from copper, brass,
aluminum and stainless and carbon steel, among others. This access to other
tubing products allows the Company to better serve its customers by offering a
full range of tubing products. Through its QuikWater division, the Company
manufactures and markets a patented direct contact water heater for commercial
and industrial applications. The Company, headquartered in Sand Springs,
Oklahoma, has three production facilities in Oklahoma and Pennsylvania and five
distribution facilities in Oklahoma, Texas, Illinois and Michigan, serving more
than 1,300 customers throughout North America.
CONCENTRATIONS - The Company maintains its cash in bank deposit accounts, which
at times may exceed the federal insurance limits. As of July 31, 2000 and
1999, the Company had cash in banks totaling $1,558,000 and $1,111,000 in
excess of federal depository insurance limits, respectively. The Company has
not experienced any losses on such accounts in the past.
ACCOUNTS RECEIVABLE - Accounts receivable represent short-term credit granted
to the Company's customers for which collateral is generally not required.
Accounts receivable at July 31, 2000 and 1999, are net of an allowance for
uncollectible amounts of $237,000 and $217,000, respectively. Credit risk on
receivables is considered by management to be limited due to the variety of
industries served and geographic dispersion of customers.
INVENTORIES - The Company values its inventories at the lower of cost or
market. Cost for raw materials, work-in-process and finished goods and
maintenance parts and supplies are determined on the weighted average cost
method.
PROPERTY, PLANT AND EQUIPMENT - Property, plant and equipment, including
tooling, is stated at historical cost and includes interest capitalized on
major construction projects. Gains or losses on sales and retirements of
property are reflected in operations. Depreciation and amortization are
provided using the straight-line method over the following estimated useful
lives: buildings and improvements - 10 to 40 years, machinery and equipment - 3
to 25 years, computer equipment and software- 3 to 7 years, and furniture and
fixtures - 3 to 10 years.
Depreciation expense for the years ended July 31, 2000, 1999 and 1998, amounted
to $5,697,000, $4,817,000 and $3,917,000, respectively. Fully depreciated
assets still in use at July 31, 2000 and 1999, amounted to $11,719,000 and
$10,007,000, respectively.
BOOK OVERDRAFTS - Included in accounts payable at July 31, 2000 and 1999, are
outstanding checks in excess of bank deposits totaling $459,000 and $159,000,
respectively.
WEBCO INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued
ACCOUNTING FOR CERTAIN LONG-LIVED ASSETS - The Company evaluates its assets for
impairment in accordance with Statement of Financial Accounting Standards No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of"("SFAS 121"). The Company reviews its long-lived
assets (including intangibles) for impairment based on estimated future
nondiscounted cash flows attributable to the assets. In the event such cash
flows are not expected to be sufficient to recover the recorded value of the
assets, the assets are written down to their estimated fair values (Note 5).
ACCOUNTING ESTIMATES - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, disclosure of contingent assets and liabilities, and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
REVENUE RECOGNITION - The Company recognizes revenue at the date products are
shipped or at the date services are completed.
EARNINGS PER SHARE - Earnings per share are calculated based on the number of
weighted average common shares outstanding, including the effect of dilutive
options when applicable, in accordance with the computation, presentation and
disclosure requirements of Financial Accounting Standards Board Statement No.
128, "Earnings Per Share" ("SFAS No. 128").
INCOME TAXES - The Company accounts for income taxes in accordance with
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes" ("FAS No. 109"). The provisions of FAS No. 109 require the recording of
deferred tax assets and liabilities to reflect the expected tax consequences in
future years of differences between the tax basis of assets and liabilities and
their financial reporting amounts at each year end.
RECLASSIFICATIONS - Certain prior year balances have been reclassified to
conform with current year financial statement presentation.
2. BUSINESS COMBINATION
In June 1998, Webco merged with P&J through the issuance of 830,000 shares
of its common stock for all of the common stock of P&J. The merger was
accounted for under the pooling of interests method of accounting; accordingly,
all historical financial information is presented as if the two entities have
always been combined.
Because Webco and P&J had differing fiscal periods prior to the
combination, Webco's financial statements for the year ended July 31, 1997 were
combined with P&J's for the calendar year ended December 31, 1997. P&J's 1998
financial statements were conformed to the twelve months ended July 31 for
purposes of consolidating with Webco's financial statements for its year ended
July 31, 1998. As a result of the overlapping period created when P&J's
calendar year was conformed to a July 31 fiscal year, $748,000 of earnings of
P&J (for the period August 1997 through December 1997) were included in
consolidated net income for both fiscal years ended July 31, 1998 and 1997.
Stockholders' equity was adjusted so that the duplicate amount is reflected
only once in retained earnings.
WEBCO INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. BUSINESS COMBINATION, continued
Prior to the merger, P&J did not incur Federal or state income taxes as it
reported its income for income tax purposes as an S Corporation. Pro forma net
income amounts reflect consolidated earnings as if P&J accrued taxes at the
statutory (Federal and state) rate of 38 percent.
Merger-related transaction costs expensed in consolidated results for the
fiscal year ended July 31, 1998, amounted to $565,000 ($350,000 or $.05 per
diluted share after tax).
3. INVENTORIES
Inventories at July 31, 2000 and 1999, consisted of the following:
2000 1999
---- ----
(Dollars in Thousands)
Raw materials $ 17,708 $ 16,437
Work-in-process 2,155 1,908
Finished goods 13,469 10,728
Maintenance parts and supplies 2,433 1,712
------- -------
Total inventories $ 35,765 $ 30,785
======= =======
4. PROPERTY, PLANT AND EQUPMENT
Net property, plant and equipment at July 31, 2000 and 1999, consisted of
the following:
2000 1999
---- ----
(Dollars in Thousands)
Land $ 1,436 $ 1,436
Buildings and improvements 19,077 15,519
Machinery and equipment 70,531 67,666
Computer equipment and software 9,259 7,515
Furniture and fixtures 1,208 712
Construction in progress 5,832 5,681
------- -------
107,343 98,529
Less accumulated depreciation and amortization 39,276 34,252
------- -------
Net property, plant and equipment $ 68,067 $ 64,277
======= =======
WEBCO INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. SPECIAL ITEM: ASSET WRITE-OFF
The Company periodically reviews the recorded value of its long-lived
assets to determine if the future cash flows to be derived from these assets
will be sufficient to recover the remaining recorded asset values. In
accordance with SFAS 121 during the fourth quarter of fiscal 2000, based upon a
review of the Company's long-lived assets, the Company recorded a non-cash
charge of $1.4 million. This included a $986,000 pre-tax charge related to the
write-off of the recorded asset values of certain QuikWater fixed assets that
were still being used in operations as of July 31, 2000, along with unamortized
patent and goodwill costs. Also included was a $414,000 pre-tax charge related
to the write-down of certain tubing equipment that the Company anticipates
selling in the near future. The Company considers continued operating losses
and significant and long-term changes in industry conditions to be its primary
indicators of potential impairment. The Company's estimates of fair value were
based on appraised values, industry comparisons, or other estimates of fair
value such as discounted future cash flows. Accordingly, actual results could
vary significantly from such estimates. The Company has continued to
depreciate the remaining book value, if any, of these assets.
6. LONG-TERM DEBT
Long-term debt at July 31, 2000 and 1999, consisted of the following:
2000 1999
---- ----
(Dollars In Thousands)
Term loans (A) $ 27,889 $ 25,000
Revolving loan (A) 17,673 12,615
Term loan (B) - 39
Revolving loan (B) 110 300
Term loan (C) 392 479
Real estate and equipment term loans (D) 1,613 1,447
Other note payable (E) 205 530
Other 187 231
------- -------
48,069 40,641
Less current maturities 4,090 895
------- -------
Long-term debt $ 43,979 $ 39,746
======= =======
Based upon the borrowing rates currently available to the Company for
borrowings with similar terms and average maturities, the Company believes that
the carrying amount of its long-term debt approximates fair value.
WEBCO INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO FINANCIAL CONSOLIDATED STATEMENTS
6. LONG-TERM DEBT, Continued
(A) The Company has a $25 million term loan, a $25 million revolving line of
credit and a capital expenditure ("CAPEX") facility in the amount of $5
million to finance equipment at the Oil City, Pennsylvania plant with its
primary lender group. The term loan and revolving credit loan bear
interest at the prime rate (9.5% at July 31, 2000) plus 1.0%. At the
Company's option, borrowings under either facility can bear interest at
LIBOR (6.63% at July 31, 2000) plus 3.75% in the case of the term loan or
CAPEX facility borrowings or plus 3.5% in the case of revolving loan
advances. Interest rate margin percentages (percentage paid over prime or
LIBOR) may drop subject to Company performance and the achievement of
certain covenant ratio levels and borrowing base availability. These
loans mature on August 31, 2002, and are collateralized by substantially
all of the Company's assets. Principal payments on the term loan commence
on August 1, 2000, at which time monthly payments of $208,000, plus
interest, are required. Beginning in November 2000, principal payments on
the CAPEX facility of $83,000, plus interest, will be due each month until
maturity. The Company may have borrowings and outstanding letters of
credit ($1,575,000 at July 31, 2000) under the revolving credit facility
up to the lesser of $25.0 million or an amount determined by a formula
based on the amount of eligible inventories and accounts receivable. The
Company pays a commitment fee of 0.25% per annum on any unused and
available line of credit and a fee of 3.0% on the outstanding amount of
letters of credit. At July 31, 2000, $5.4 million was available for
borrowing under the line of credit. At July 31, 2000, $2.9 million was
outstanding on the CAPEX facility and $2.1 million was available for
borrowing.
Pursuant to the terms of the loan agreement, the Company is subject to
various restrictive covenants, including requirements to maintain a
minimum debt coverage ratio and to not exceed a ratio of indebtedness to
net worth. The covenants also limit capital expenditures and dividends.
In addition, the loan agreement provides for acceleration of the loans, at
the option of the lender, if F. William Weber and Dana S. Weber fail to
possess the power to direct or cause the direction of management and
policies of the Company, or the Weber Family ceases to own at least 35
percent of the outstanding voting stock, or upon the occurrence of a
material adverse change in the business. All financial covenants are
measured on the basis of the Company without consolidating its wholly
owned subsidiary, P&J.
During fiscal year 2000 and as of July 31, 2000, the Company was in
non-compliance with certain of the financial covenants contained in the
loan agreement and on November 13, 2000 obtained waivers from the lenders.
In addition to granting the waivers, the lenders modified and reduced the
debt coverage and indebtedness ratio loan covenants up to January 31,
2002. An additional covenant was added requiring the Company to maintain
a minimum borrowing base availability without considering the $25 million
revolving loan cap. The covenant levels for all periods including and
subsequent to January 31, 2002 are unchanged by the amendment.
(B) P&J has a line-of-credit agreement for $2,000,000. The line of credit
matures on November 30, 2000, bears interest at the lessor of prime rate
(9.50% at July 31, 2000) or LIBOR (6.63% at July 31, 2000) plus 2%, and is
collateralized by P&J's assets and guaranteed by Webco. The term loan was
retired in January 2000.
(C) The Company's subsidiary, P&J, has a $500,000 term note with a bank, which
matures in April 2004. The note bears interest at 7.5% with monthly
installments of $10,000, and is collateralized by P&J's assets and
guaranteed by Webco.
WEBCO INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. LONG-TERM DEBT, Continued
(D) These loans were entered into with various public agencies payable in
monthly installments aggregating approximately $12,000, including
interest, at rates ranging from 3 to 5 percent. The notes are
collateralized by the underlying real estate and/or equipment, and the
guarantee of the principal stockholder/officer. The notes mature over a
4 to 10 year period. An additional $1.5 million remains available for
borrowing as of July 31, 2000, although consumation of such borrowings are
conditional upon certain approvals from the primary lender which, as of
November 13, 2000, have not been obtained and there are no assurances that
the approval will be obtained.
(E) This note is payable in 36 monthly installments of $30,000 through
March 31, 2000, and bears interest at 9 percent.
At July 31, 2000, the aggregate future maturities of long-term debt are as
follows: 2001 - $4,090,000; 2002 - $3,792,000; 2003 - $38,916,000; 2004 -
$304,000; 2005 - $130,000; and thereafter $837,000.
7. INCOME TAXES
The provision for income taxes for fiscal 2000, 1999 and 1998 consists of
the following:
2000 1999 1998
---- ---- ----
(Dollars in Thousands)
Current:
Federal $ - $ - $ 115
State 166 67 111
Deferred:
Federal (705) 956 2,305
State (82) 113 271
------ ------ ------
Total income tax expense (benefit) $ (621) $ 1,136 $ 2,802
====== ====== ======
Prior to merging with Webco on June 29, 1998, P&J was treated as a
Subchapter S Corporation for income tax purposes, with earnings included in the
personal income tax returns of its stockholders.
The actual income tax expense for fiscal 2000, 1999 and 1998 differs from
income tax based on the federal statutory rate (34%) due to the following:
2000 1999 1998
---- ---- ----
(Dollars in Thousands)
Expected tax expense (benefit) $ (560) $ 1,024 $ 3,063
State income taxes, net of federal benefit (66) 120 386
Exclusion of S Corporation income - P&J - - (623)
Other 5 (8) (24)
------ ------ ------
Total income tax expense $ (621) $ 1,136 $ 2,802
====== ====== ======
WEBCO INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
7. INCOME TAXES, Continued
At July 31, 2000 and 1999, deferred tax assets and deferred tax
liabilities consisted of the following:
2000 1999
---- ----
(Dollars in Thousands)
Net current deferred tax assets (liabilities):
Accounts receivable $ 102 $ 100
Inventories 375 476
Accrued liabilities 1,570 1,555
Operating loss carry forwards - 882
------- -------
Net current deferred tax asset $ 2,047 $ 3,013
======= =======
Net non-current deferred tax assets (liabilities):
Property plant and equipment $(12,445) $(12,538)
General business credit carry forward 38 48
Alternative minimum tax credit carry forward 452 321
Intangible assets 409 207
Operating loss carry forwards 1,337 -
------- -------
Net non-current deferred tax liability $(10,209) $(11,962)
======= =======
The Company has operating loss carry forwards for regular tax purposes of
approximately $3,350,000, which expire in 2012 to 2015.
8. COMMITMENTS AND CONTINGENCIES
LITIGATION - On May 27, 1999, a jury awarded the Company $1.1 million on
certain claims against an equipment vendor. Because of a pre-trial ruling by
the courts, the jury was unable to award the Company lost profits and certain
other incidental and consequential damages. The Company is currently pursuing
attorneys' fees and has appealed the pre-trial order to obtain lost profits.
There can be no assurances that the Company will be successful on appeal or
that if successful, lost profits awarded in the succeeding trial, if any, will
be commensurate with actual lost profits suffered by the Company. The vendor
has appealed the jury's original verdict and there can be no assurances as to
what the outcome of that appeal will be. Due to the uncertainty surrounding
the case, the financial statements do not include any portion of the jury award
or other recoveries.
The Company is party to various other lawsuits and claims arising out of the
ordinary course of its business. Management believes that any liability
resulting from these matters would not materially affect the results of
operations or the financial position of the Company.
WEBCO INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. COMMITMENTS AND CONTINGENCIES, Continued
LEASES - The Company leases certain buildings and machinery and equipment under
non-cancelable operating leases. Under certain of these leases the Company is
required to pay property taxes, insurance, repairs and other costs related to
the leased property. At July 31, 2000, future minimum payments under non-
cancelable leases accounted for as operating leases are $1,565,000 in 2001;
$1,036,000 in 2002; $826,000 in 2003; $479,000 in 2004; and $386,000 in 2005.
Total rent expense for all operating leases was $2,268,000, $2,191,000 and
$2,250,000 in 2000, 1999 and 1998, respectively.
SELF-INSURANCE - The Company maintains a hospitalization and medical
coverage program for its employees. Claims under this program are limited to
annual losses of $60,000 per participant, and aggregate annual claims of up to
$2,000,000 through the use of a stop-loss insurance policy. Additionally, the
Company self-insures Oklahoma workers' compensation claims up to $225,000 per
occurrence and retains a maximum aggregate liability of $2,000,000 per two-year
policy term with respect to all occurrences. The Company has a performance
bond in the amount of $550,000 on file with the State of Oklahoma Workers'
Compensation Court, as required by self-insurance regulations. Provisions for
claims under both programs are accrued based upon the Company's estimate of the
aggregate liability for claims (including claims incurred, but not yet
reported). The total reserve for self-insurance for medical and workers'
compensation was $1,500,000 and $1,621,000 at July 31, 2000 and 1999,
respectively.
PURCHASE COMMITMENTS - At July 31, 2000 and 1999, the Company was committed on
outstanding purchase orders for inventory approximating $13.3 million and $24.7
million, respectively. Additionally, the Company had on its premises at July
31, 2000 and 1999, raw material on consignment from certain vendors valued at
approximately $2.2 million and $4.1 million, respectively.
9. EMPLOYEE BENEFIT PLANS
The Company maintains 401-K benefit plans covering all employees meeting
certain service requirements. The plans include a cash or deferred
compensation arrangement permitting elective contributions to be made by the
participants. Company contributions are made at the discretion of the Board of
Directors. Company contributions were $327,000, $419,000 and $439,000 in
fiscal 2000, 1999 and 1998, respectively.
10. STOCKHOLDERS' EQUITY AND STOCK OPTIONS
In January 1994, the Company's stockholders approved the 1994 Stock
Incentive Plan (the "Plan"), in which directors, employees and consultants are
eligible to participate. Four types of benefits may be granted in any
combination under the Plan: incentive stock options, non-qualified stock
options, restricted stock and stock appreciation rights. The Plan also
provides for certain automatic grants to outside directors. All options expire
ten years from the date of grant (except the vice-chairman's options, which
expire five years from the date of grant) and are exercisable at a price which
is at least equal to fair market value on the date of grant (110% of fair
WEBCO INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. STOCKHOLDERS' EQUITY AND STOCK OPTIONS, Continued
market value in the case of the vice-chairman). The employee options vest
evenly over a period of two to five years from the date of grant. The maximum
number of shares of common stock with respect to which incentive stock options,
non-qualified stock options, restricted stock and stock appreciation rights
may be issued under the Plan is 850,000.
Activity under the Plan for the last three fiscal years was as follows:
Number of Weightd Average
Shares Exercise Price
--------- --------------
Balance, July 31, 1997 355,900 $6.42
Granted 188,600 $7.24
Forfeited (30,000) $6.35
--------
Balance, July 31, 1998 514,500 $6.69
Granted 66,200 $6.17
Forfeited ( 42,700) $7.23
--------
Balance, July 31, 1999 538,000 $6.58
Granted 230,300 $4.17
Forfeited ( 36,800) $6.03
--------
Balance, July 31, 2000 731,500 $5.85
========
Outstanding options and exercisable options at July 31, 2000 were as follows:
Number Weighted Average Weighted
Of Remaining Average
Exercise Prices Shares Contractual Life Exercise Price
--------------- ------ ---------------- --------------
Outstanding:
$3.31 - $5.75 272,000 8.8 years $4.31
$6.13 - $8.75 459,500 6.4 years $6.76
Exercisable:
$3.31 - $5.75 39,940 7.5 years $4.87
$6.13 - $8.75 292,520 6.2 years $6.70
WEBCO INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. STOCKHOLDERS' EQUITY AND STOCK OPTIONS, Continued
The Company has elected to follow APB Opinion No. 25, "Accounting for
Stock Issued to Employees," in accounting for its employee stock options rather
than the alternative fair value accounting provided for under SFAS No. 123,
"Accounting for Stock-Based Compensation." Under APB No. 25, because the
exercise price of the Company's stock options is at least equal to the market
price of the underlying stock on the date of grant, no compensation expense is
recognized in the Company's financial statements. Pro forma information
regarding net income and earnings per share is required by SFAS No. 123. This
information is required to be determined as if the Company had accounted for
its employee stock options granted subsequent to July 31, 1995, under the fair
value method of that statement.
The fair value of options granted in fiscal years 2000, 1999 and 1998
reported below has been estimated at the date of grant using a Black-Scholes
option pricing model with the following assumptions:
2000 1999 1998
---- ---- ----
Weighted average life 4.0 years 4.0 years 4.3 years
Risk-free interest rate 5.92-6.26% 5.14% 5.88%
Expected volatility 55% 56% 56%
Expected dividend yield None None None
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options that have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions, including the expected stock price
volatility. Because the Company's options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in the opinion
of management, the existing models do not necessarily provide a reliable single
measure of fair value of its options. The weighted average estimated fair
value of employee stock options, whose exercise price equals the market value
on the grant date, granted during 2000, 1999 and 1998 was $1.92, $2.88 and
$3.61 per share, respectively. The weighted average estimated fair
value of employee stock options, whose exercise price exceeds the market value
on the grant date, granted during 2000 was $4.00 and $1.69, respectively.
There were no options granted in 1999 or 1998 with a exercise price exceeding
market value on the grant date.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The
Company's pro forma information for fiscal years 2000, 1999 and 1998 is as
follows:
2000 1999 1998
---- ---- ----
Pro forma net income (loss) $(1,253,000) $1,625,000 $5,926,000
========= ========= =========
Pro forma net income (loss) per share, diluted $(0.18) $ 0.23 $ 0.82
===== ===== =====
The above SFAS No. 123 pro forma disclosures are not necessarily
representative of the effect SFAS No. 123 will have on the pro forma disclosure
of future years.
WEBCO INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. STOCKHOLDERS' EQUITY AND STOCK OPTIONS, Continued
In March 1999, the Company's Board of Directors approved a plan to acquire
up to $500,000 of its common stock. Of the approved $500,000 repurchase, the
Company acquired 95,000 shares of stock for approximately $448,000 during
Fiscal year 1999.
11. EARNINGS PER SHARE
Presented below is a reconciliation of the differences between actual
weighted average shares outstanding, which are used in computing basic earnings
per share, and diluted weighted average shares, which are used in computing
diluted earnings per share.
2000 1999 1998
---- ---- ----
(shares in thousands)
Basic EPS:
Weighted average shares outstanding 7,074 7,135 7,169
Effect of dilutive securities: Options - 4 76
----- ----- -----
Diluted EPS:
Diluted weighted average shares outstanding 7,074 7,139 7,245
===== ===== =====
Anti-dilutive options outstanding (1):
Number of options 732 480 8
===== ===== =====
Weighted average exercise price $ 5.85 $ 6.76 $ 9.05
===== ===== =====
(1) Anti-dilutive options and their average exercise prices were not
included in the computation of diluted earnings per share due to the
option exercise prices being greater than the average market price of
the common shares.
12. SEGMENT INFORMATION
The Company applies the provisions of FAS 131 "Disclosures about Segments
of an Enterprise and Related Information." The Company has two reportable
segments: tubing products and QuikWater, representing the Company's two
strategic business units offering different products. The Company internally
evaluates its business by facility, however, because of the similar economic
characteristics of the tubing operations, including the nature of products,
processes and customers, those operations have been aggregated for segment
reporting purposes. The tubing products segment manufactures as well as
distributes tubular products principally made of carbon and stainless steel.
QuikWater manufactures a patented direct contact, high efficiency water heater.
WEBCO INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. SEGMENT INFORMATION, Continued
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies. The Company measures segment
profit or loss as segment income before income taxes. Information about the
Company's segments is as follows:
Tubing
Products QuikWater Total
-------- --------- -----
(Dollars in Thousands)
Fiscal year-ended July 31, 2000:
Revenues $138,338 $2,582 $140,920
Depreciation and amortization 5,512 398 5,910
Interest expense 3,800 192 3,992
Segment profit (loss) 1,022 (2,668) (1,646)
Segment assets 119,970 1,398 121,368
Capital expenditures 10,401 61 10,462
Fiscal year-ended July 31, 1999:
Revenues 131,282 3,462 134,744
Depreciation and amortization 5,008 150 5,158
Interest expense 2,454 98 2,552
Segment profit (loss) 4,630 (1,618) 3,012
Segment assets 110,000 3,396 113,396
Capital expenditures 12,495 60 12,555
Fiscal year-ended July 31, 1998:
Revenues 149,810 1,621 151,431
Depreciation and amortization 4,059 74 4,133
Interest expense 2,214 82 2,296
Segment profit (loss) 11,053 (2,044) 9,009
Segment assets 102,180 3,515 105,695
Capital expenditures 10,238 414 10,652
A reconciliation of the Company's segment information to the consolidated
financial statements is as follows:
2000 1999 1998
---- ---- ----
(Dollars in Thousands)
Total assets reported for segments $121,368 $113,396 $105,695
Assets not allocated to segments:
Current assets 4,115 3,482 3,211
Notes receivable and other assets 4,640 3,603 2,852
-------- -------- --------
Total assets: $130,123 $120,481 $111,758
======== ======== ========
WEBCO INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. RELATED PARTY TRANSACTIONS
In October 1995, the Company entered into an agreement with an entity
owned by the majority stockholders to subcontract certain manufacturing
services. Beginning in late 2000, the Company contracted with the same entity
to subcontract the production of QuikWater units. Payments made by the Company
under the contracts totaled $506,000 and $612,000 in fiscal 2000 and 1999,
respectively. In addition, the Company had a receivable balance of $949,000
and $798,000 at July 31, 2000 and 1999, respectively, for amounts paid on
behalf of this entity.
The Company purchases certain specialty packaging and shipping materials
from an entity owned by the principal stockholder. Payments made by the
Company totaled $163,000 in fiscal 2000 and $177,000 in fiscal 1999.
The Company leases its distribution facility in Nederland, Texas from an
entity owned by certain Company executives. The amount of the monthly lease
payments was determined at the beginning of the lease by an independent
evaluation. During both 1999 and 2000, lease expense under the agreement
totaled $64,800.
Advances were made from time to time during fiscal 1998 and prior years
(none during 2000) to the principal stockholder with the highest amounts
outstanding being $1,200,000 in 2000 and 1999. The balance outstanding at
July 31, 2000 and 1999, was $1,200,000. The advances are subject to a one-year
note from the principal stockholder collateralized by Company stock. The note
bears interest at the prevailing rate under the Company's loan agreement with
its primary lender and is payable at maturity of the note on August 15, 2001.
Accrued interest on the note receivable was $489,000 and $393,000 at July 31,
2000 and 1999, respectively, and is included in other assets in the
accompanying balance sheets.
Other advances on various terms were made to certain executives during
fiscal 1999, with the highest amount outstanding being $175,000 in 2000 and
1999. The balance outstanding at July 31, 2000 and 1999, was $175,000.
During 1994, in the course of purchasing stock from the principal
stockholder, certain executives executed promissory notes payable to the
principal stockholder in the amount of $273,000, which, as amended, bear
interest at 4.1 percent. The notes are collateralized by the underlying shares
of common stock. The principal stockholder subsequently assigned the
executives' notes receivable to the Company in order to liquidate certain
advances and other amounts owed by him to the Company. Accrued interest on the
notes receivable from related parties totaled $61,000 and $47,000 at July 31,
2000 and 1999, respectively, and is included in other assets in the
accompanying balance sheets.
WEBCO INDUSTRIES, INC.
SUPPLEMENTAL CONSOLIDATED QUARTERLY FINANCIAL DATA
(UNAUDITED)
(Dollars in thousands, except per share data)
Year Ended July 31, 2000
Quarters Ended
October 31, January 31, April 30, July 31, Total
1999 2000 2000 2000 Year
---------- ---------- -------- ------- --------
Net sales $33,322 $34,898 $36,289 $36,411 $140,920
Gross profit 4,939 5,259 4,821 4,349 19,368
Income from operations 861 1,280 1,110 (905)(1) 2,346(1)
Net income (loss) 66 180 69 (1,340) (1,025)
Net income (loss) per
diluted common share $ .01 $ .03 $ .01 $ (.19) $ (.14)
Weighted average shares
outstanding, diluted 7,074 7,074 7,082 7,074 7,074
Year Ended July 31, 1999
Quarters Ended
October 31, January 31, April 30, July 31, Total
1998 1999 1999 1999 Year
---------- ---------- -------- ------- --------
Net sales $36,583 $32,124 $31,970 $34,067 $134,744
Gross profit 6,967 4,612 4,903 4,871 21,353
Income from operations 2,555 883 1,153 973 5,564
Net income 1,212 172 347 145 1,876
Net income per diluted
common share $ .17 $ .02 $ .05 $ .02 $ .26
Weighted average shares
outstanding, diluted 7,193 7,186 7,130 7,075 7,139
Note: The above quarterly financial data may not total to the annual amounts
because of rounding.
(1) Includes a special item: asset write-off of $1,400,000 of certain QuikWater
fixed assets and unamortized patent and goodwill costs along with certain
tubing equipment.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There have been no changes in or disagreements between the Company and its
independent auditors.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Directors
- --------- Director
Name Age Positions with Company Since
- ---- --- ---------------------- --------
F. William Weber 74 Chairman of the Board and Chief 1969
Executive Officer
Dana S. Weber 43 Vice Chairman of the Board, 1990
President and Chief Operating
Officer
Dr. Kenneth E. Case 56 Director 1995
Frederick C. Ermel 58 Director 1993
Neven C. Hulsey 66 Director 1993
Christopher L. Kowalski 47 Director, President of Phillips & 1998
Johnston, Inc.
Executive Officers
- ------------------ Officer
Name Age Positions with Company Since
- ---- --- ---------------------- -------
H. Lee Beard 58 Chief Information Officer and Vice 1987
President - Management Systems
David E. Boyer 41 Vice President - Sales and Marketing, 1992
and Secretary
Michael P. Howard 37 Chief Financial Officer, Vice 1997
President - Finance and
Administration, and Treasurer
Stuart D. Keeton 42 Vice President and General Manager - 1995
Stainless Products Division
Troy Kuske 39 Vice President and General Manager 1998
QuikWater Division
William F. Obermark 59 Vice President - Corporate Development 1984
Rodney W. Watkins 34 Vice President and General Manager - 1999
Oil City Division
Randyl D. Watson 34 Vice President and General Manager - 1999
Southwest Tube Division
Thomas M. Willey 58 Vice President - Materials Management 1995
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT, continued
F. William Weber is Chairman of the Board and Chief Executive Officer of
the Company, positions he has held with the Company or its predecessors since
founding the Company in 1969. Mr. Weber's term as a Director of the Company
expires in December 2002. Mr. Weber also serves on the Advisory Board of Selco
Industries Corporation, Inc., a privately-held manufacturer of promotional
timepieces, and is Chairman of the Board of Custom Containers International
("C-CAM"), a company owned by the Weber Family which manufactures intermodal
tank containers and fabricates other metal products, and Diversified Plastics,
Inc. ("Diversified"), a company owned by F. William Weber which primarily
manufactures plastic access panels and performs some packaging services. Mr.
Weber is not actively involved in the day-to-day operations of C-CAM or
Diversified.
Dana S. Weber became President of the Company in June 1995, and is also
Vice Chairman of the Board and Chief Operating Officer, positions she has held
since June 1990. Ms. Weber's term as a Director of the Company expires in
December 2002. Ms. Weber was the acting Chief Financial Officer of the Company
from August 1994 to July 1995. Ms. Weber served as Chief Financial Officer and
Treasurer of the Company from 1986 to June 1990. Ms. Weber has been with the
Company or its predecessors in various positions since 1977. Ms. Weber also
serves on the Board of C-CAM, but has not been actively involved in the
day-to-day operations of C-CAM since March 1, 1994. Ms. Weber is the daughter
of F. William Weber.
Dr. Kenneth E. Case has been a Director of the Company since July 1995.
Dr. Case's term as a Director of the Company expires in December 2001. Dr. Case
is a Regents Professor of Industrial Engineering and Management and has been at
Oklahoma State University since August 1975. He is a licensed professional
engineer and was named the Outstanding Engineer in Oklahoma in 1987. His
primary specialties are in the fields of quality and reliability. Dr. Case was
a Senior Examiner on the Malcolm Baldrige National Quality Award from 1988 to
1990, and on the Panel of Judges from 1991 to 1993. He is a member of the
National Academy of Engineering and the International Academy for Quality. He
is a Fellow and past president of the Institute of Industrial Engineers and a
Fellow of the American Society for Quality Control. Dr. Case has also been
project director on over twenty sponsored research projects and has published
over 100 articles and co-authored three books.
Frederick C. Ermel has been a Director of the Company since November 1993.
Mr. Ermel's term as a Director of the Company expires in December 2001. Since
September 1990, Mr. Ermel has been President of the Carreden Group, Inc., an
investment banking firm and registered broker-dealer. From January 1980 to
September 1990, Mr. Ermel was a Managing Director of PaineWebber, Inc., a
brokerage and investment banking firm.
Neven C. Hulsey has been a Director of the Company since December 1993.
Mr. Hulsey's term as a Director of the Company expires in December 2000. Mr.
Hulsey is a former Director and former Chairman of the Board of the Earle M.
Jorgensen Company ("Jorgensen"), the largest independent distributor of metal
products in the United States. From May 1990 until January 1997, Mr. Hulsey
was a Director and President and Chief Executive Officer of Jorgensen as well
as the Earle M. Jorgensen Holding Company, Inc., the parent of Jorgensen. From
1984 to May 1990, Mr. Hulsey was Chairman of the Board, President, and Chief
Executive Officer, of Kilsby-Roberts Holding Co., a predecessor of Jorgensen.
Mr. Hulsey has been a Director of International House of Pancakes, Inc., since
August 1987. In September 1997, he became an Advisor of the University of
Pacific's Business Advisory Board. As of November 1996, Mr. Hulsey completed
a five-year term as a Regent of the University of the Pacific, as well as a
Director of the Steel & Aluminum Industry and the National Association of
Aluminum Distributors.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT, continued
Christopher L. Kowalski joined the Company and was elected to fill a
vacancy on the board of directors, effective with the closing of the merger
between the Company and Phillips & Johnston, Inc. ("P&J"), in June 1998. Mr.
Kowalski's term as a director of the Company will expire in December 2000. Mr.
Kowalski was a 50% owner of P&J prior to the merger. Mr. Kowalski joined P&J
in 1979 and has served as its president since 1987. Prior to his employment
with P&J, Mr. Kowalski worked for Central Steel & Wire, Inc.
H. Lee Beard is Vice President of Management Systems and has been with the
Company since November 1987. Mr. Beard has been in the specialty tubing
industry since 1979. Mr. Beard was the Chief Executive Officer of C-CAM from
April 1989 to January 1990.
David E. Boyer is Vice President of Sales and Marketing and has held that
position since July 1992. Mr. Boyer became Secretary of the Company in November
1993. Mr. Boyer previously served as General Manager-Stainless Division from
June 1991 to July 1992; as Product Manager, Stainless Products, from February
1989 to June 1991; and in various other positions with the Company since 1984.
Mr. Boyer is a Fall 1998 graduate of the Program for Management Development at
Harvard University.
Michael P. Howard joined the Company as Chief Financial Officer and Vice
President of Finance and Administration in January, 1997. Prior to joining the
Company, Mr. Howard was Vice President of Finance and Administration and Chief
Financial Officer for Multimedia Games Inc. from January 1996 to January 1997.
From May 1985 to January 1996 Mr. Howard was with the international accounting
firm of Coopers & Lybrand LLP, where he worked in the Business Assurance Group
and served as the audit manager on the Company's audit during five years of
that period. Mr. Howard is a Certified Public Accountant.
Stuart D. Keeton has been Vice President and General Manager of Stainless
Products since November 1995. Mr. Keeton had previously been the General
Manager of Stainless Operations from July 1992 to November 1995, and has been
with the Company in various positions since December 1980.
Troy Kuske has been Vice President and General Manager of the QuikWater
Division since October 1999. From December 1996 to October 1999, Mr. Kuske was
QuikWater's West Coast Regional Manager. From 1990 until joining QuikWater in
1996, Mr. Kuske was president of Accent C&M, a residential construction
remodeling company located in Tulsa, Oklahoma.
William F. Obermark is the Vice President of Corporate Development, a
position he has held since December 1998. From November 1995 until 1998, he
was the Vice President and General Manager of the Southwest Tube Division. Mr.
Obermark previously was Vice President of Engineering, a position he had held
with the Company since June 1984. Mr. Obermark has been with the Company in
various positions since 1980, and has been in the specialty tubing industry
since 1969.
Rodney W. Watkins has been the Vice President and General Manager of the
Oil City Tubing Division since January 2000. Mr. Watkins previously served as
the General Manager and Maintenance Engineering Manager in Oil City. Mr.
Watkins has been with the Company since 1990.
Randyl D. Watson was named the Vice President and General Manager of the
Southwest Tube Division in Sand Springs in January 2000. From 1998 to January
2000, Mr. Watson was the General Business Manager of Weld Mill Operations and
then all Operations at Southwest Tube. From 1993 to 1997, Mr. Watson was the
Chief Engineer and Plant Manager for Southwestern Pipe in Houston Texas. In
addition to his current tenure, Mr. Watson was employed by the Company as its
Production Engineering Manager in Sand Springs from 1989 to 1993 when he left
to join Southwestern Pipe.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT, continued
Thomas M. Willey has been Vice President of Materials Management since
March 1995. Mr. Willey has been with the Company in various purchasing and
materials acquisition and management positions since May 1980.
The Company's Amended and Restated Certificate of Incorporation provides
that the Board of Directors shall be divided into three classes as nearly equal
in number as possible and that one class shall be elected each year and serve
for a three-year term. Executive officers hold office until their successors
are chosen and qualified, subject to earlier removal by the Board of Directors.
Meetings of Board of Directors
During the fiscal year ended July 31, 2000, the Board of Directors held
four meetings. During that period no Director attended fewer than 75% of the
aggregate of (i) the total number of meetings of the Board of Directors held
during the period for which he or she was a director, and (ii) the total number
of meetings held by all Committees of the Board of Directors on which he served
during the period.
Board Committees Meetings and Membership
The Company has an Audit Committee of the Board of Directors whose members
are: Dr. Kenneth E. Case, Frederick C. Ermel (Chairman) and Neven C. Hulsey;
and a Compensation Committee whose members are: F. William Weber, Dr. Kenneth
E. Case, Frederick C. Ermel and Neven C. Hulsey.
The Audit Committee meets with management and the Company's independent
accountants to determine the adequacy of internal controls and other financial
matters. In March 2000, the Audit Committee adopted and the Board approved an
audit committee charter to meet new Securities and Exchange Commission
regulation. A copy of the charter accompanies this report. The Compensation
Committee reviews general policy matters relating to compensation and benefits
of employees and officers of the Company and administers the Company's 1994
Stock Incentive Plan. The Audit Committee held two meetings in fiscal 1999, and
the Compensation Committee held three meetings in fiscal 1999. (See "Report of
Compensation Committee" and "Report of Audit Committee".)
Directors' Compensation
Pursuant to the Company's 1994 Stock Incentive Plan (the "Plan"), each
director who is not an employee of the Company receives an initial grant
(either on the date the Plan was adopted or on the date such person first
becomes a director) of options to purchase 3,000 shares of Common Stock.
Thereafter, each outside director, on January 1 of each year, will receive
options to purchase 1,500 shares of Common Stock. All such options will be
exercisable at the fair market value at the date of grant, commencing six
months after the date of grant. In fiscal 2000, each of Messrs. Case, Ermel and
Hulsey received options to purchase 1,500 shares of Common Stock at a price of
$3.31 per share. Outside directors who are not members of the Compensation
Committee are also eligible for discretionary grants under the Plan. In
addition, directors of the Company who are not employees receive directors'
fees of $10,000 per year and $1,500 for each Board meeting or committee meeting
attended in person ($2,000 if such director is the Chairman of the Board or the
committee) and $500 (or $1,000, for the Chairman) for each meeting attended by
telephone. Outside directors also receive reimbursement of all out-of-pocket
expenses related to meetings attended. Officers of the Company who serve as
directors do not receive compensation for their services as directors other
than the compensation they receive as officers of the Company.
ITEM 11. EXECUTIVE COMPENSATION
Executive Compensation
The following table sets forth the cash compensation paid or accrued by the
Company for services rendered during fiscal 2000 to the Company's Chief
Executive Officer and the other four most highly compensated executive officers
of the Company, whose compensation exceeded $100,000 (the "Named Executive
Officers").
SUMMARY COMPENSATION TABLE
Annual Compensation
Other Annual
Name and Principal Position Year Salary Bonus Compensation
- --------------------------- ---- ------ ----- ------------
F. William Weber 2000 $ 422,700 $ - $ -
Chairman of the Board and Chief 1999 434,300 192,000 -
Executive Officer 1998 425,400 157,000(4) -
Dana S. Weber 2000 $ 254,000 $ - $ 10,000(2)
Vice Chairman of the Board, President 1999 265,300 112,000 20,000(2)
and Chief Operating Officer 1998 252,500 20,000 9,600(2)
Christopher L. Kowalski (5) 2000 $ 200,000 $ 68,000 $ 5,800(1)
Director, President of Phillips & 1999 200,000 18,600 5,800(1)
Johnston, Inc.
David E. Boyer 2000 $ 115,700 $ - $ -
Vice President - Sales and Marketing, 1999 115,200 72,000 -
Secretary 1998 107,000 - 20,000(2)
Michael P. Howard 2000 $ 115,300(3) $ - $ -
Vice President - Finance & Admin., 1999 115,000(3) 57,700 9,000(2)
Treasurer and Chief Financial Officer 1998 116,650(3) - 9,000(2)
(1) Represents the aggregate amount paid by the Company for life insurance policies.
(2) Represents amounts paid by the Company for the person's benefit in respect of
deferred compensation plans maintained for certain of the Company's executives.
(3) Fiscal years 2000, 1999 and 1998 include $8,400, $8,400 and $5,300, respectively,
subsequently repaid to the Company as interest on outstanding advances totaling
$175,000, $175,000 and $147,000, respectively, at July 31, 2000, 1999 and 1998,
respectively. (See "Certain Transactions.")
(4) $125,000 of such bonus to Mr. Weber was paid pursuant to an arrangement whereby the
bonus was based on a multiple of a measured increase in the market value of the
Company's Common Stock. There were no such amounts paid in 2000 or 1999. See
"Report of the Compensation Committee".
(5) Compensation information for Mr. Kowalski is presented for the period subsequent to
the merger of Webco and Phillips and Johnston, Inc in June 1998.
Note: Bonuses reflected above as paid in fiscal year 1999 represent fiscal year 1998 performance awards.
ITEM 11. EXECUTIVE COMPENSATION, continued
Employment Agreements and Termination of Employment Arrangements
Each of F. William Weber, Dana S. Weber, Christopher L. Kowalski and
Michael P. Howard is employed pursuant to an agreement which terminates
December 31, 2002. The agreements provide for a base salary of $422,706 for Mr.
Weber, $225,000 for Ms. Weber, $200,000 for Mr. Kowalski and $115,000 for Mr.
Howard, subject to such increases as may be approved by the Compensation
Committee, and the use of an automobile. Mr. Weber also receives reimbursement
annually for the cost of certain life insurance policies, and the Company pays
the cost of life insurance policies for Ms. Weber and Mr. Kowalski, as
described in the footnotes to the Summary Compensation Table above. Upon the
occurrence of a "change in control," each of the above will be entitled to
receive an amount equal to three times the sum of his or her base salary plus
the highest bonus paid to him or her in the prior three years (plus such amount
as is necessary so that such payment is received net of any special or excise
taxes), payable at such person's option in either a lump-sum or over three
years with interest. A "change in control" is generally defined in the
agreements to have occurred if (i) the Company consummates a merger in which
the Company is not the surviving corporation or in which shares of Common Stock
are converted into other property, other than a merger in which the holders of
the Common Stock immediately prior to such merger have substantially the same
proportionate ownership of Common Stock of the corporation surviving such
merger, (ii) the Company sells, leases, exchanges, or transfers (in one or a
series of related transactions) all or substantially all of its assets, (iii)
the Company's stockholders approve a liquidation or dissolution of the Company,
(iv) any person (as such term is used in Sections 13(d) and 14(d)(2) of the
Securities Exchange Act of 1934, as amended), other than the Company or any
employee benefit plan sponsored by the Company, becomes the beneficial owner of
either (A) 51% of the Common Stock or (B) a greater percentage of the Common
Stock than is held by the Weber Family, or (v) at any time during two
consecutive years, individuals who, at the beginning of such period,
constituted the Board of Directors cease to constitute at least a majority
thereof, unless the election or nomination of each new director during such
two-year period was approved by at least two-thirds of the directors then in
office who were directors at the beginning of such two-year period.
Stock Options
The following table summarizes individual grants of options made during
fiscal year 2000 to each of the Named Executive Officers:
Individual Option Grants in Last Fiscal Year
Number of % of Total Potential Realized
Securities Options Value at Assumed
Underlying Granted to Per Share Annual Rate of Stock
Options Employees in Exercise Vesting Expiration Price Appreciation
Name Granted Fiscal Year Price Period Date for Option Term
- ---- ------- ------------ ----- ------ ---- ---------------
5% 10%
------ ------
F. William Weber - - $ - - - $ - $ -
Dana S. Weber - - - - - - -
Chris L. Kowalski - - - - - - -
David E. Boyer 6,000 3.4% 4.00 5 Yrs 9-30-09 13,000 33,000
Michael P. Howard 6,000 3.4% 4.00 5 Yrs 9-30-09 13,000 33,000
ITEM 11. EXECUTIVE COMPENSATION, continued
The following table shows the number of shares of Common Stock represented
by outstanding stock options held by the Named Executive Officers as of July
31, 2000. Also reported are the values for "in the money" options which
represent positive spread between the exercise price of any such existing stock
options and the fiscal year-end price of the Common Stock.
Aggregated Option Exercises in 2000
and Fiscal Year-End Option Values
Number of Securities Value of Unexercised
Number of Securities Underlying Unexercised Options at In-the-Money
Underlying Options Options at Fiscal Options at Fiscal
Year-End (#) Year-End ($ )
Value
Name Exercised (#) Realized ($) Exercisable Unexercisable Exercisable Unexercisable
F. William Weber - - - - $ - $ -
Dana S. Weber - - 19,200 12,800 - -
Chris L. Kowalski - - - - - -
David E. Boyer - - 22,800 9,200 - -
Michael P. Howard - - 15,600 16,400 - -
Report of the Compensation Committee
The Compensation Committee (the "Committee") of the Board of Directors is
comprised of the three non-employee directors and the Chief Executive Officer.
The Committee is responsible for reviewing and making recommendations to the
Board of Directors regarding the compensation and benefits of the Company's
management personnel.
As discussed under "Employment Agreements and Termination of Employment
Arrangements," the Company entered into employment agreements with F. William
Weber, the Company's Chief Executive Officer, and Dana S Weber, the Company's
Chief Operating Officer. Because the salary of Mr. Weber during fiscal 2000
has been solely pursuant to his employment agreement, the Committee has not
formulated specific policies concerning compensation of the Chief Executive
Officer. Based upon its review of the relationship between the salaries of
Chief Executive Officers and Chief Operating Officers in comparable companies,
the Compensation Committee has established a salary policy for the Chief
Operating Officer whereby the base salary for that position is approximately
60% of the base salary of the Chief Executive Officer.
While decisions regarding salary levels for management personnel, other
than the Chief Executive Officer and Chief Operating Officer, are determined by
the Chief Executive Officer and the Chief Operating Officer (subject to review
by the Committee), the Committee has established general policies designed to
enable the Company to reward qualified management personnel and to provide
long-term incentives. The Committee's philosophy is that the Company's goals
are more likely to be achieved if final compensation is tied to the Company's
performance during the year, and that long-term stock options are longer term
incentives that are closely aligned with shareholder return. In fiscal 2000,
176,000 new options were granted to 190 employees and management personnel
(68,000 of which were granted to 9 executives), as authorized by the
Compensation Committee. The specific number of options granted was commensurate
with the degree of responsibility of the grantee's position and the length of
the grantee's employment. No options have been granted to the Chief Executive
Officer.
ITEM 11. EXECUTIVE COMPENSATION, continued
The Committee has approved supplemental compensation plans for the Chief
Executive Officer, Chief Operating Officer and other senior management
personnel.
In order to incent the CEO and COO to operate the Company such that
long-term shareholder value is maximized, the Committee awards an annual bonus
to the CEO and COO that is equal to the increase in the market value of the
Company's Common Stock at a measurement date over an established bonus base
stock price times a multiple established by the Committee. The measurement
date has been established as two weeks after the Company's fourth fiscal
quarter earnings release and the bonus base stock price is typically the market
value of the Company's Common Stock on the date the bonus multiple is set by
the Committee. Upon payment of a bonus under the plan, the bonus base stock
price changes to the stock price upon which the payment was made. Reductions
in the bonus base stock price are not made during the measurement period for
subsequent decreases in stock price. In 1997, the Committee established a
bonus for the CEO on the above terms with a bonus multiple of 50,000 and a
bonus base stock price of $5.75. In 1998, $125,000 was paid to the CEO as a
bonus on the 1997 multiple and the bonus base stock price was increased to
$8.25. In 1998, the Committee established an additional bonus for the CEO and
an initial bonus for the COO with multiples of 16,000 and 10,000, respectively,
each having a bonus base stock price of $7.25. No bonus was paid on any of the
multiples based on the market price of the Company's stock two weeks after the
1998, 1999 or 2000 fourth fiscal quarter earnings releases and there were no
changes to the bonus base stock price of any of the awards.
The Committee has approved a bonus compensation plan for the senior staff,
including the CEO and COO, that is intended to reward participants for
attaining budgetary goals that are established by the Company and approved by
the Committee. The plan is designed to pay a target bonus if such budgetary
goals are attained and increases or decreases the bonus amount at an
accelerated rate if such budgetary goals are exceeded or under-achieved,
respectively. In certain circumstances, the Company deposits all or part of
any such bonuses to a deferred compensation plan maintained by the Company for
the benefit of certain of the Company's executives. The bonuses reflected in
the Summary Compensation Table as paid during fiscal year 1999 represent fiscal
year 1998 performance awards. Other than with respect to the president of the
Company's subsidiary, Phillips & Johnston, no such bonuses were paid or are to
be paid for fiscal years 1999 and 2000.
MEMBERS OF COMPENSATION COMMITTEE
F. William Weber
Dr. Kenneth E. Case
Frederick C. Ermel
Neven C. Hulsey
Compensation Committee Interlocks and Insider Participation in Compensation
Decisions
The Compensation Committee of the Company's Board of Directors is
comprised of Messrs. Weber, Ermel, Hulsey and Case. Mr. Weber is the Chairman
of the Board and Chief Executive Officer of the Company. There are no
compensation committee interlocks. See "Certain Transactions."
ITEM 11. EXECUTIVE COMPENSATION, continued
Stock Price Performance Data
The following data compares on a cumulative basis the percentage change
since the Company's initial public offering in February 1994, in the total
shareholder return on the Company's Common Stock, with (a) the total return or
the AMEX Market Value Index, which is being used as the required broad entity
market index, and (b) the total return for a selected peer group index (the
"Peer Group"). The Peer Group consists of Huntco Inc., Maverick Tube
Corporation, Steel Technologies, Inc., Lone Star Technologies and Synalloy
Corporation. The graph assumes (i) investment of $l00 on February 8, 1994 in
the Company's Common Stock, the AMEX Market Value Index and the common stock
of the Peer Group, and (ii) the reinvestment of all dividends.
Cumulative Total Return
7/95 7/96 7/97 7/98 7/99 7/00
----- ----- ----- ----- ----- -----
WEBCO INDUSTRIES, INC. 100.00 88.46 105.77 120.19 70.19 46.15
AMEX MARKET VALUE 100.00 100.87 122.39 145.17 163.23 189.44
PEER GROUP 100.00 118.44 233.54 108.90 132.44 235.46
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The table below sets forth the beneficial ownership of the Common Stock as
of July 31, 2000 by (i) each person known by the Company to own beneficially
more than 5% of the outstanding shares of Common Stock, (ii) each director,
(iii) each of the executive officers of the Company, including the executive
officers named in the "Summary Compensation Table" below, and (iv) all
directors and executive officers of the Company as a group.
Amount and Nature
of Beneficial Percent
Name Position Ownership of Class
- ---- -------- --------- ---------
F. William Weber Chairman of the Board 2,081,888 (1) 29.4%
and Chief Executive Officer
Dana S. Weber Vice Chairman of the Board, 820,987 (3) 11.6
President, Chief Operating
Officer
Kimberly A.W. Frank Assistant Secretary 401,686 (3) 5.7
Christopher L. Kowalski Director and President of 415,000 (4) 5.9
Phillips & Johnston, Inc.
Kenneth E. Case Director 12,000 (2) *
Neven C. Hulsey Director 15,000 (2) *
Frederick C. Ermel Director 19,000 (2) *
H. Lee Beard Chief Information Officer, 80,225 (2) 1.1
Vice President - Management
Systems
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT,
continued
Amount and Nature
of Beneficial Percent
Name Position Ownership of Class
- ---- -------- --------- ---------
David E. Boyer Vice President - Sales & 121,814 (2) 1.7
Marketing, and Secretary
Heartland Advisors, Inc. 475,500 (5) 6.7
Troy Kuske Vice President - QuikWater 4,000 (2) *
Michael P. Howard Chief Financial Officer, Vice 59,329 (2) *
President - Finance and
Administration, Treasurer and
Assistant Secretary
Stuart D. Keeton Vice President and General 38,911 (2) *
Manager - Stainless Products
Division
William F. Obermark Vice President - Corporate 107,601 (2) 1.5
Development
Robert N. Pressly 385,000 (4) 5.4
Rodney W. Watkins Vice President and General 5,600 (2) *
Manager - Oil City Division
Randyl D. Watson Vice President and General 4,200 (2) *
Manager - Oil City Division
Wellington Management 505,300 (6) 7.1
Company, LLP
Thomas M. Willey Vice President - Materials 42,396 (2) *
Management
All directors and executive 4,614,640 65.2%
officers of the Company as a
group (seventeen persons)
* - Less than 1%
(1) F. William Weber, Martha A. Weber, Dana S. Weber and Kimberly A.W. Frank
(the "Weber Family") each hold his or her shares in a revocable living
trust. F. William Weber and Martha A. Weber are husband and wife and are
co-trustees of the trusts established by each other. Certain members of
the Weber Family (F. William Weber, Martha A. Weber, Dana S. Weber and
Kimberly A.W. Frank) may be deemed to be a "group," as such term is used
in Section 13(d) of the Securities Exchange Act of 1934, as amended, and
the rules promulgated thereunder, and to share beneficial ownership of the
shares owned by each other member of the Weber Family. Each member of the
Weber Family disclaims beneficial ownership of the shares owned by each
other member of the Weber Family, except Mr. and Mrs. F. William Weber as
to the shares owned by the other (shares shown in the table for each
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT,
continued
member of the Weber Family do not include shares as to which beneficial
ownership is disclaimed as aforesaid). In addition, members of the Weber
Family disclaim beneficial ownership of certain shares included in those
shown for them in the table, as follows: Mr. and Mrs. F. William Weber
disclaim beneficial ownership of 262,648 shares held in an irrevocable
trust, of which they are the trustees, for the benefit of Ashley R. Weber;
Dana S. Weber disclaims beneficial ownership of 2,800 shares held in an
irrevocable trust, of which she is the trustee, for the benefit of the
children of Kimberly A.W. Frank; and Kimberly A.W. Frank disclaims
beneficial ownership of 4,600 shares held in an irrevocable trust, of
which she is a co-trustee, for the benefit of the child of Dana S. Weber.
The address of each such stockholder is c/o Webco Industries, Inc., 9101
West 21st Street, Sand Springs, Oklahoma 74063.
(2) Includes shares of Common Stock that directors and executive officers had
the right to acquire on September 30, 2000 as follows: Dana S. Weber,
19,200; Kimberly A.W. Frank, 800; Dr. Kenneth E. Case, 10,500; Neven C.
Hulsey, 12,000; Frederick C. Ermel, 12,000; H. Lee Beard, 22,800; David E.
Boyer, 22,800; Troy Kuske, 4,000; Michael P. Howard, 9,200; Stuart D.
Keeton, 22,800; Thomas M. Lewis, 22,800; William F. Obermark, 22,800;
Rodney W. Watkins, 5,600, Randyl D. Watson 4,200 and Thomas M. Willey,
22,800.
(3) See Footnotes (1) and (2) above.
(4) The address of Robert N. Pressly and Christopher L. Kowalski is c/o Webco
Industries, Inc., 9101 West 21st Street, Sand Springs, Oklahoma 74063.
(5) According to Schedule 13G dated January 27, 2000. The address of
Heartland Advisors, Inc. is 790 North Milwaukee Street, Milwaukee, WI
53202.
(6) According to letter dated October 26, 2000. The address of Wellington
Management Company, LLP is 75 State Street, Boston, MA 02109.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
C-CAM
The Company paid C-CAM $506,000 in fiscal 2000 pursuant to a contract with
C-CAM for certain fabrication activities at market rates and terms for such
activities. In addition, the Company had a receivable balance at July 31, 2000
of $949,000 for amounts paid on behalf of C-CAM.
Diversified Plastics. Inc.
The Company purchases certain specialty packaging and shipping material
from Diversified Plastics, Inc., an entity owned by F. William Weber. Payments
made by the Company totaled $163,000 in fiscal 2000
Advances to Affiliates
Mr. F. William Weber, Chairman of the Board and Chief Executive Officer,
had an outstanding advance during fiscal 2000 and at July 31, 2000 of
$1,200,000. The advance is subject to a note from Mr. Weber, collateralized by
certain assets. The note bears interest at the prevailing rate under the
Company's Loan Agreement with its primary lender and is payable at maturity of
the note on August 15, 2001.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, continued
Loan to Officer
The Company has made advances to certain executives. As of July 31, 2000,
such advances included $168,000 to Mr. William F. Obermark, $105,000 to Mr.
David E. Boyer and $175,000 to Mr. Michael P. Howard. The advances are subject
to a notes collateralized by certain assets. Interest on the advances to
Messrs. Obermark and Boyer is charged at the rate of 4.1% and $61,084 is
accrued at July 31, 2000. The notes to Messrs Obermark and Boyer mature on
February 15, 2001 and August 1, 2001, respectively. Interest on the note to
Mr. Howard bears interest at 5.7% is paid currently ($8,400 during fiscal year
2000). The note is due on January 31, 2001.
Lease of Facility
The Company leases warehouse space in a facility in Nederland, Texas that
is owned by a partnership, of which the principals are five vice presidents of
the Company. During fiscal year 2000, the Company paid $64,800 to the
partnership in rentals. The rentals were established at the beginning of the
lease based on an independent evaluation.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K
(a) The following documents are filed as part of this report:
(1) Financial Statements of Webco Industries, Inc. which are included
in Part II,
Item 8:
Reports of Independent Accountants
Consolidated Balance Sheets as of July 31, 2000 and 1999
Consolidated Statements of Operations for each of the three years
in the period ended July 31, 2000
Consolidated Statements of Changes in Stockholders' Equity for
each of the three years in the period ended July 31, 2000
Consolidated Statements of Cash Flows for each of the three years
in the period ended July 31, 2000
Notes to Consolidated Financial Statements
Supplemental Consolidated Quarterly Financial Data (Unaudited)
(2) Financial Statement Schedule:
Schedule II - Valuation and Qualifying Accounts
(3) Exhibits:
Exhibit
Number Description
3 (i) Form of Amended and Restated Certificate of Incorporation
(incorporated by reference to Exhibit 3(i) to the Company's
Registration Statement on Form S-1, No. 33-72994).
3 (ii) By-Laws (incorporated by reference to Exhibit 3(ii) to the
Company's Registration Statement on Form S-1, No. 33-72994).
10.1 Form of 1994 Stock Incentive Plan, as amended (incorporated by
reference to Exhibit 4.1 to the Company's Registration Statement on
Form S-8,No. 333-49219).
10.2 Loan and Security Agreement, dated as of July 15, 1997, between
American National Bank and Trust Company of Chicago, as agent,
certain financial institutions as lender, and the Company
(incorporated by reference to Exhibit 10.2 to the Company's Form
10-K dated July 31, 1997, File No. 0-23242).
10.3 Amendment No. 1 and Waiver Agreement to Loan and Security Agreement
dated July 15, 1997, between American National Bank and Trust
Company of Chicago, as agent, certain financial institutions as
lender, and the Company (incorporated by reference to Exhibit 10.3
to the Company's Form 10-K dated July 31, 1998, File No. 0-23242).
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K - Continued
Exhibit
Number Description
- ------- -----------
10.4 Lease, dated October 22, 1996, between the Company and Baker
Performance Chemicals Incorporated (incorporated by reference to
Exhibit 10.3 to the Company's Form 10-K dated July 31, 1997, File
No. 0-23242).
10.5 Employment Agreement dated December 31, 1996, between the Company
and F. William Weber (incorporated by reference to Exhibit 10.4 to
the Company's Form 10-K dated July 31, 1997, File No. 0-23242).
10.6 Employment Agreement dated December 31, 1996, between the Company
and Dana S. Weber (incorporated by reference to Exhibit 10.5 to the
Company's Form 10-K dated July 31, 1997, File No. 0-23242).
10.7 Employment Agreement dated June 30, 1998, between the Phillips &
Johnston,Inc. Company and Christopher L. Kowalski (incorporated by
reference to Exhibit 10.7 to the Company's Form 10-K dated July 31,
1998, File No. 0-23242).
10.8 Lease, dated March 16, 1998, between the Company and Tubular
Properties,Ltd. (incorporated by reference to Exhibit 10.8 to the
Company's Form 10-K dated July 31, 1998, File No. 0-23242).
10.9 Agreement and Plan of Reorganization dated as of June 29, 1998 by
and among Webco Industries, Inc., P&J Acquisition Corp., Phillips &
Johnston, Inc.,Christopher L Kowalski and Robert N. Pressly
(incorporated by reference to Exhibit 99.1 to the Company's Form
8-K, File No. 0-23242).
10.10 Loan and Security Agreement, dated as of April 9, 1997, between
American National Bank and Trust Company of Chicago, as agent,
certain financial institutions as lender, and Phillips & Johnston,
Inc. (incorporated by reference to Exhibit 10.10 to the Company's
Form 10-K dated July 31, 1998, File No. 0-23242).
10.11 Loan Agreement, dated December 1, 1998, between Pennsylvania
Economic Development Financing Authority and Webco Industries, Inc.
(incorporated by reference to Exhibit 10.11 to the Company's Form
10-Q dated January 31, 1999,File No. 0-23242).
10.12 Reimbursement Agreement, dated as of December 1, 1998, between
American National Bank and Trust Company of Chicago and Webco
Industries, Inc. (incorporated by reference to Exhibit 10.12 to the
Company's Form 10-Q dated January 31, 1999, File No. 0-23242).
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K - Continued
Exhibit
Number Description
- ------- -----------
10.13 Amendment No. 2 to Loan and Security Agreement dated July 15, 1997,
between American National Bank and Trust Company of Chicago, as
agent, certain financial institutions as lender, and the Company
(incorporated by reference to Exhibit 10.13 to the Company's Form
10-Q dated January 31, 1999, File No. 0-23242).
10.14 Amendment No. 5 to Loan and Security Agreement dated July 15, 1997,
between American National Bank and Trust Company of Chicago, as
agent, certain financial institutions as lender, and the Company.
23.1 Consent of PricewaterhouseCoopers LLP
27.1 Financial Data Schedule
(b) Reports on Form 8-K:
None
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
WEBCO INDUSTRIES, INC.
November 13, 2000 By: /s/ F. William Weber
F. William Weber
Chairman, Chief Executive
Officer and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
November 13, 2000 By: /s/ F. William Weber
F. William Weber
Chairman, Chief Executive
Officer and Director
November 13, 2000 By: /s/ Dana S. Weber
Dana S. Weber
President, Chief Operating Officer
and Director
November 13, 2000 By: /s/ Michael P. Howard
Michael P. Howard
Chief Financial Officer
November 13, 2000 By: /s/ Christopher L. Kowalski
Christopher L. Kowalski
President-Phillips & Johnston, Inc.
November 13, 2000 By: /s/ Frederick C. Ermel
Frederick C. Ermel
Director
November 13, 2000 By: /s/ Neven C. Hulsey
Neven C. Hulsey
Director
November 13, 2000 By: /s/ Kenneth E. Case
Kenneth E. Case
Director
WEBCO INDUSTRIES, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
For the Three Years Ended July 31, 2000
(Dollars in Thousands)
Additions
----------------------
Balance at Charged to Charged to Balance at
Beginning of Costs and Other (1) End of
Description Period Expenses Accounts Deductions Period
- ----------- ------ -------- -------- ---------- ------
Allowance for
bad debts:
1998 49 139 - (9) 179
1999 179 45 - (7) 217
2000 217 35 - (15) 237
Reserve for inventory
obsolescence
1998 29 1,184 - (33) 1,180
1999 1,180 261 - (850) 591
2000 591 360 - (385) 566
(1) Amounts represent write-offs, net of recoveries.
Exhibit 10.14
AMENDMENT NO. 5
TO LOAN AND SECURITY AGREEMENT
THIS AMENDMENT NO. 5 TO LOAN AND SECURITY AGREE-MENT (this "Amendment")
is entered into as of November 10, 2000 by and among Webco Industries, Inc.
(the "Borrower"), the financial institutions named on the signature page
hereto, and American National Bank and Trust Company of Chicago, as agent (in
such capacity, the "Agent") for the Lenders.
WITNESSETH:
WHEREAS, the Borrower, the financial institutions from time to time
parties thereto (the "Lenders") and the Agent have entered into that certain
Loan and Security Agreement dated as of July 15, 1997 (as amended, the "Loan
Agreement");
WHEREAS, the Borrower desires that the Loan Agreement be amended as set
forth herein; and
WHEREAS, the undersigned Lenders and the Agent are willing so to amend the
Loan Agreement, but only on the terms and subject to the conditions set forth
below;
NOW, THEREFORE, in consideration of the premises set forth above, the
terms and conditions contained herein, and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged,
the parties hereto agree as follows:
1. Definitions. Terms defined in the Loan Agreement which are used
herein shall have the same meanings as are set forth in the Loan Agreement for
such terms unless otherwise defined herein.
2. Amendments. Subject to Section 4 below:
(a) Subsection 1.1 of the Loan Agreement is hereby amended by adding the
following definitions in their proper alphabetical place:
"Applicable Base Rate Margin" shall mean, as to any Base Rate Advance,
0.75%; provided, however, after Lenders' receipt of the financial statements
required to be provided by Borrower pursuant to Subsection 7.1(A) for any
quarter (each, a "Fiscal Quarter") of any Fiscal Year, then the Applicable Base
Rate Margin shall be adjusted from time to time effective on the first day (the
"Change Date") of the third month following the end of such Fiscal Quarter
(commencing with the Fiscal Quarter ending April 30, 2001, so the first date on
which an adjustment shall be made is July 1, 2001) based on the following: (i)
if Borrower's Adjusted Debt Coverage Ratio (as hereinafter defined) for the
four Fiscal Quarters ending with such Fiscal Quarter is greater than or equal
to 1.2 to 1.0 and Borrower's Average Daily Unconstrained Availability for the
two Fiscal Quarters ending with such Fiscal Quarter is greater than or equal to
$10,000,000, then the Applicable Base Rate Margin shall be 0.00% (the "Level 1
Pricing"); (ii) if Borrower's Adjusted Debt Coverage Ratio for the four Fiscal
Quarters ending with such Fiscal Quarter is greater than or equal to 1.0 to 1.0
and Borrower's Average Daily Unconstrained Availability for the two Fiscal
Quarters ending with such Fiscal Quarter is greater than or equal to
$7,000,000, but the condition precedent to application of Level 1 Pricing have
not been satisfied, then the Applicable Base Rate Margin shall be 0.25% ("Level
2 Pricing"); and (iii) if the condition precedent have not been satisfied for
either Level 1 Pricing or Level 2 Pricing, then the Applicable Base Rate Margin
shall be 0.75% ("Level 3 Pricing").
"Applicable L/C Fee Rate" shall mean 3.00%; provided, however, the
Applicable L/C Fee Rate shall be adjusted from time to time in accordance with
changes in the Applicable Base Rate Margin so that at any time when Level 1
Pricing, Level 2 Pricing and Level 3 Pricing is applicable, the Applicable L/C
Rate shall be 1.50%, 2.25% and 3.00%, respectively.
"Average Daily Unconstrained Availability" shall mean, for any period, an
amount equal to the daily average (determined by the Agent based on the
Collateral Reports) of the amount by which (i) the sum of (A) up to eighty-five
percent (85%) of the face amount (less maximum discounts, credits and
allowances which may be taken by or granted to Account Debtors in connection
therewith) then outstanding under existing "Eligible Accounts" (as defined in
Subsection 3.2 hereof), less such reserves as Agent in its sole discretion and
in Good Faith elects to establish; plus (B) an amount equal to up to sixty
percent (60%) of Borrower's existing "Eligible Inventory" (as defined in
Subsection 3.10 hereof), of raw material, work-in-process and finished goods,
valued at the lower of cost, determined on an average cost basis, or market,
less such reserves as Agent in its sole discretion and in Good Faith elects to
establish, minus (C) the Letter of Credit Obligations, plus (D) 80% of the
undrawn face amount of the K-Letter of Credit, exceeds (ii) the aggregate
balance of the unpaid principal amount of the Revolving Loans.
(b) Subsection 1.1 of the Loan Agreement is hereby further amended by
amending and restating the following definition in its entirety:
"Applicable LIBOR Margin" shall mean, as to any Advance consisting of all
or any portion of any Revolving Loans, Term Loans, and CAPEX Loans, 3.25%,
3.50% and 3.50%, respectively; provided, however, the Applicable LIBOR Margin
shall be adjusted from time to time in accordance with changes in the
Applicable Base Rate Margin so that at any time when Level 1 Pricing, Level 2
Pricing and Level 3 Pricing is applicable, the Applicable LIBOR Margin shall
mean, as to any Advance consisting of all or any portion of any Revolving
Loans, 1.75%, 2.50% and 3.25%, respectively, and the Applicable LIBOR Margin
shall mean, as to any Advance consisting of all or any portion of any Term
Loans or CAPEX Loans, 2.00%, 2.75% and 3.50%, respectively.
(c) The first grammatical sentence of Subsection 2.20(A) of the Loan
Agreement is hereby amended and restated in its entirety as follows:
Borrower shall pay to Agent for the account of Lenders interest on the
outstanding principal balance of the Revolving Loans and Term Loans and the
other Liabilities, other than the outstand-ing principal amount of LIBOR Rate
Advances, at a per annum rate equal to the from time to time Base Rate plus
the Applicable Base Rate Margin.
(d) The first grammatical sentence of Subsection 2.20(G)(i) of the Loan
Agreement is hereby amended and restated in its entirety as follows:
Agent, for the ratable benefit of Lenders, shall be entitled to charge to
the account of Borrower on the last day of each month, a fee (the "L/C Fee"),
in an amount equal to the Applicable L/C Fee Rate per annum of the average
daily outstanding Letter of Credit Obligations (including without limitation
the outstanding amount of the PEDFA Letter of Credit before giving effect to
any reductions therein which are subject to reinstatement) for each month (or
portion thereof) from the date of the execution of this Agreement, payable
monthly in arrears on the first Business Day of each following month.
(e) Subsection 8.15 of the Loan Agreement is hereby amended and restated
in its entirety as follows:
8.15 Financial Covenants . Borrower shall not:
(A) Debt Coverage Ratio. Permit its Debt Coverage Ratio for any twelve
month period ending with the last day of a Fiscal Quarter ending on or after
January 31, 2002 to be less than 2.5 to 1.0. As used herein the term "Debt
Coverage Ratio" shall mean, for any period, without duplication, Borrower's
ratio of (A) EBIDA, plus any "Quikwater Write-Off Amount" (as hereinafter
defined) during such period, to (B) an amount equal to the sum of the following
for such period: (i) the sum of interest expense; plus (ii) the sum of all
principal payments on Indebtedness of Borrower, other than required principal
payments on the Revolving Loan; plus (iii) the aggregate amount of all
Dividends and Distributions (except to the extent the same are (A) payable
solely in capital stock of Borrower or any of its Subsidiaries, or (B) are
payable from any Subsidiary to Borrower). As used herein, the term "Quikwater
Write-Off Amount" shall mean the amount of any non-recurring charge incurred by
Borrower with respect to the final closure of its Quikwater Division, net of
any tax benefit realized by Borrower as a result thereof.
(B) Leverage Ratio. Permit its Leverage Ratio to at any time exceed (i)
if the date of determination is on or before July 31, 2001, 1.25 to 1.0, (ii)
if the date of determination is after July 31, 2001 and before January 31,
2002, 1.20 to 1.0 and (iii) if the date of determination is on or after January
31, 2002, 1.0 to 1.0. As used herein the term "Leverage Ratio" shall mean, at
any time, Borrower's ratio of (i) Indebtedness to (ii) net worth, minus
Borrower's investment in, and loans or advances from, Borrower to any
Subsidiary at such time, plus any Quikwater Write-Off Amount arising after the
date hereof.
(C) Adjusted Debt Coverage Ratio. Permit its Adjusted Debt Coverage
Ratio for the twelve month period ending with (i) October 31, 2000 to be less
than 0.19 to 1.0, (ii) January 31, 2001 to be less than 0.32 to 1.0, (iii)
April 30, 2001 to be less than 0.41 to 1.0, (iv) July 31, 2001 to be less than
0.61 to 1.0, or (v) October 31, 2001 to be less than 0.73 to 1.0. As used
herein the term "Adjusted Debt Coverage Ratio" shall mean for any period,
without duplication, Borrower's ratio of (A) EBITDA, to (B) an amount equal to
the sum of the following for such period: (i) the sum of interest expense; plus
(ii) the sum of all principal payments on Indebtedness of Borrower, other than
required principal payments on the Revolving Loan; plus (iii) the aggregate
amount of all Dividends and Distributions (except to the extent the same are
(A) payable solely in capital stock of Borrower or any of its Subsidiaries, or
(B) are payable from any Subsidiary to Borrower). As used herein, the term
"EBITDA" shall mean, as to any period, an amount equal to the sum of the
following for Borrower for such period: (i) earnings before income tax expense
(determined based on the valuation of inventory on an average cost basis); plus
(ii) interest expense subtracted in determining earnings; plus (iii)
depreciation, amortization, and other non-cash charges deducted in determining
earnings; plus (iv) cash contributions to the capital of the Borrower and the
net cash proceeds of the sale of capital stock of the Borrower; minus (v) to
the extent included in the earnings of Borrower for such period, equity in
undistributed earnings of Subsidiaries; minus (vi) the aggregate amount of
Dividends and other Distributions; and minus (vii) Capital Expenditures for
such period other than Capital Expenditures representing capitalized lease
obligations incurred or which were financed through the incurrence of purchase
money secured financing (other than the Revolving Loans) and provided that up
to $1,000,000 of Borrower's Capital Expenditures incurred in connection with
the expansion, renovation and equipping of Borrower's manufacturing plant in
Oil City, Pennsylvania shall be deemed to have been financed in November, 2000
by the Pennsylvania Industrial Development Authority ("PIDA"), regardless of
whether or when the proposed loan from PIDA to Borrower closes.
(C) Average Daily Unconstrained Availability. Permit its Average Daily
Unconstrained Availability for any month to be less than $6,000,000.
3. Waiver. Subject to Section 4 below, the Required Lenders hereby
waive any Event of Default arising under the Loan Agreement as a result of a
breach of Section 8.15 thereof before giving effect to the amendments to the
Loan Agreement contemplated hereby.
4. Conditions of Effectiveness. Sections 2 and 3 of this Amendment
shall become effective on the date (the "Effective Date") that the Agent has
determined that each of the following conditions have been satisfied:
(a) Documents. The Agent shall have received each of the following
agreements, instruments and other documents, in each case in form and substance
acceptable to the Agent:
(i) seven (7) copies of this Amendment executed by each of the parties
hereto; and
(ii) seven (7) copies of a Consent substantially in the form of Exhibit A
hereto executed by an authorized officer of P&J.
(b) Closing Fee. The Borrower shall have paid to Agent for the ratable
benefit of the Lenders that are parties to this Amendment a non-refundable fee
in the amount of $75,000 to induce the such Lenders to enter into this
Amendment.
5. Representations, Warranties and Agreements of the Borrower.
(a) The Borrower represents and warrants that this Amendment and the Loan
Agreement, as amended hereby, constitute legal, valid and binding obligations
of the Borrower and are enforceable against the Borrower in accordance with
their terms, except as enforcement may be limited by bankrupt-cy, insolvency,
reorganization or other similar laws affecting the enforcement of creditors'
rights generally or by general equitable principles.
(b) The Borrower hereby reaffirms all covenants, representa-tions and
warranties made in the Loan Agreement as amended hereby. The Borrower hereby
agrees that all covenants, representations and warranties made in the Loan
Agreement shall be deemed to have been remade as of the date hereof and (if
different) the Effective Date.
(c) The Borrower represents and warrants that as of the date hereof, and
(if different) as of the Effective Date, there exists no Default or Event of
Default after giving effect to this Amendment and the consummation of the
transactions contemplated hereby and thereby.
6 Reference to the Effect on the Loan Agreement.
(a) On and after the Effective Date, (i) each reference in the Loan
Agreement to "this Agreement," "hereunder," "hereof," "herein," or words of
like import shall mean and be a reference to the Loan Agreement as amended
hereby, and (ii) each reference to the Loan Agreement in all other Financing
Agreements shall mean and be a reference to the Loan Agree-ment, as amended
hereby.
(b) Except as specifically amended above, the Loan Agreement, and all
other documents, instruments and agreements executed and/or delivered in
connection therewith, shall remain in full force and effect, and are hereby
ratified and confirmed.
(c) The execution, delivery and effectiveness of this Amendment shall not
operate as a waiver of any Default or Event of Default (including without
limitation any Defaults or Events of Default existing on the date hereof), nor
operate as a waiver of any right, power or remedy of the Agent or the Lenders
(including without limitation any rights, powers or remedies of the Agent or
the Lenders with respect to the Defaults or Events of Default existing on the
date hereof), nor constitute a waiver of, or consent to and departure from, any
provision of the Loan Agreement, or any of the other Financing Agreements.
7. Governing Law. This Amendment shall be governed by and construed in
accordance with the internal laws (as opposed to conflicts of law provisions)
of the State of Illinois.
8. Headings. Section headings in this Amendment are included herein for
convenience of reference only and shall not constitute a part of this Amendment
for any other purpose.
9. Counterparts. This Amendment may be executed by one or more of the
parties to this Amendment on any number of separate counterparts and all of
said counterparts taken together shall be deemed to constitute one and the same
instrument. Delivery by any party of telecopied copies of executed
counterparts hereof shall constitute execution and delivery hereof by such
party.
IN WITNESS WHEREOF, this Amendment has been duly executed as of the day
and year first above written.
WEBCO INDUSTRIES, INC.
By: /s/ Michael P. Howard
---------------------
Title: Chief Financial Officer
AMERICAN NATIONAL BANK AND TRUST
COMPANY OF CHICAGO, individually and as
Agent
By: /s/ Donna H. Evans
------------------
Title: Vice President
BANK OF AMERICA, N.A., formerly,
NATIONSBANK, N.A.
By: /s/ Gaye Stathis
-------------------
Title: Vice President
EXHIBIT A
CONSENT
The undersigned, as guarantor under one or more guaranties made by the
undersigned in favor of American National Bank and Trust Company of Chicago, as
Agent ("Agent"), hereby consents to that certain Amendment No. 5 to Loan and
Security Agree-ment (the "Amendment") dated as of November 10, 2000 between
Webco Industries, Inc., the financial institutions named on the signature page
thereto, and American National Bank and Trust Company of Chicago, as agent (in
such capacity, the "Agent") for the Lenders, and the amendments, waivers and
consents contained therein and confirms and agrees that, notwithstanding the
Amendment and the effectiveness of the amendments, waivers, consents and
agreements contained therein, the guaranty executed by the undersigned is, and
shall continue to be, in full force and effect and is hereby confirmed and
ratified in all respects notwithstanding the terms of the Amendment or any
other amendment to the Loan Agreement, as defined in the Amendment. Nothing
herein is intended or shall be deemed to limit Agent's or any Lender's (as
defined in the Loan Agreement referred to in the Amendment) rights under any
guaranty to take actions without the consent of the undersigned.
Dated as of November 13, 2000
Phillips & Johnston, Inc.
By: /s/ Michael P. Howard
----------------------------
Title: Vice President
Exhibit 23.1
Webco Industries, Inc.
9101 West 21st Street
Sand Springs, OK 70463
We consent to the incorporation by reference in the registration statements
of Webco Industries, Inc. on Form S-3 (File No. 333-22779 and 333-67923) and
Form S-8 (File No. 333-49219) of our report dated September 21, 2000, except
for the third paragraph in Note 6(A), as to which the date is November 13,
2000, relating to the consolidated financial statements and financial statement
schedule which appears in this Form 10-K.
PricewaterhouseCoopers LLP
Tulsa, Oklahoma
November 13, 2000